To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Tianshan Aluminum GroupLtd (SZSE:002532), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tianshan Aluminum GroupLtd, this is the formula:

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

0.08 = CN¥2.7b ÷ (CN¥57b - CN¥23b) (Based on the trailing twelve months to September 2023).

Thus, Tianshan Aluminum GroupLtd has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.3% generated by the Metals and Mining industry, it's much better.

In the above chart we have measured Tianshan Aluminum GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tianshan Aluminum GroupLtd.

What Can We Tell From Tianshan Aluminum GroupLtd's ROCE Trend?

On the surface, the trend of ROCE at Tianshan Aluminum GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Tianshan Aluminum GroupLtd has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Tianshan Aluminum GroupLtd's ROCE

To conclude, we've found that Tianshan Aluminum GroupLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 34% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Tianshan Aluminum GroupLtd we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.