If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Qinhuangdao Tianqin Equipment ManufacturingLtd (SZSE:300922) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Qinhuangdao Tianqin Equipment ManufacturingLtd:

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

0.021 = CN¥19m ÷ (CN¥952m - CN¥74m) (Based on the trailing twelve months to September 2023).

So, Qinhuangdao Tianqin Equipment ManufacturingLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 5.3%.

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Qinhuangdao Tianqin Equipment ManufacturingLtd, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Qinhuangdao Tianqin Equipment ManufacturingLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 47% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 4 warning signs for Qinhuangdao Tianqin Equipment ManufacturingLtd (2 are a bit concerning) you should be aware of.

While Qinhuangdao Tianqin Equipment ManufacturingLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.