There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Silvery Dragon Prestressed MaterialsLTD Tianjin (SHSE:603969), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Silvery Dragon Prestressed MaterialsLTD Tianjin is:

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

0.066 = CN¥146m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Silvery Dragon Prestressed MaterialsLTD Tianjin has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.2% average generated by the Metals and Mining industry.

See our latest analysis for Silvery Dragon Prestressed MaterialsLTD Tianjin

Historical performance is a great place to start when researching a stock so above you can see the gauge for Silvery Dragon Prestressed MaterialsLTD Tianjin's ROCE against it's prior returns. If you'd like to look at how Silvery Dragon Prestressed MaterialsLTD Tianjin has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Silvery Dragon Prestressed MaterialsLTD Tianjin Tell Us?

On the surface, the trend of ROCE at Silvery Dragon Prestressed MaterialsLTD Tianjin doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.6% from 8.3% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Silvery Dragon Prestressed MaterialsLTD Tianjin's ROCE

Bringing it all together, while we're somewhat encouraged by Silvery Dragon Prestressed MaterialsLTD Tianjin's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Silvery Dragon Prestressed MaterialsLTD Tianjin (including 1 which is a bit concerning) .

While Silvery Dragon Prestressed MaterialsLTD Tianjin isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.