If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Yueyang Forest & Paper (SHSE:600963) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Yueyang Forest & Paper, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.029 = CN¥335m ÷ (CN¥17b - CN¥5.1b) (Based on the trailing twelve months to September 2023).

Therefore, Yueyang Forest & Paper has an ROCE of 2.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.4%.

See our latest analysis for Yueyang Forest & Paper

Above you can see how the current ROCE for Yueyang Forest & Paper compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yueyang Forest & Paper here for free.

What Can We Tell From Yueyang Forest & Paper's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.3% five years ago, while the business's capital employed increased by 23%. Usually this isn't ideal, but given Yueyang Forest & Paper conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Yueyang Forest & Paper might not have received a full period of earnings contribution from it.

What We Can Learn From Yueyang Forest & Paper's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Yueyang Forest & Paper is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 99% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Yueyang Forest & Paper does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.