If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over Malion New Materials' (SZSE:300586) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Malion New Materials is:

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

0.11 = CN¥284m ÷ (CN¥3.3b - CN¥678m) (Based on the trailing twelve months to September 2023).

Therefore, Malion New Materials has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.7% it's much better.

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

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 352% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Malion New Materials has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 20% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Malion New Materials' ROCE

In the end, Malion New Materials has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 0.4% return to shareholders who held over that period. So to determine if Malion New Materials is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Malion New Materials does have some risks though, and we've spotted 2 warning signs for Malion New Materials that you might be interested in.

While Malion New Materials 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.