If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Jiangsu HHCK Advanced MaterialsLtd (SHSE:688535), it didn't seem to tick all of these boxes.

Understanding 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 Jiangsu HHCK Advanced MaterialsLtd, this is the formula:

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

0.019 = CN¥20m ÷ (CN¥1.2b - CN¥140m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu HHCK Advanced MaterialsLtd has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.3%.

Above you can see how the current ROCE for Jiangsu HHCK Advanced MaterialsLtd 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 Jiangsu HHCK Advanced MaterialsLtd for free.

So How Is Jiangsu HHCK Advanced MaterialsLtd's ROCE Trending?

In terms of Jiangsu HHCK Advanced MaterialsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.9% from 3.5% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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, Jiangsu HHCK Advanced MaterialsLtd has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Jiangsu HHCK Advanced MaterialsLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 29% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Jiangsu HHCK Advanced MaterialsLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Jiangsu HHCK Advanced MaterialsLtd 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.