If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Jiangling Motors Corporation's (SZSE:000550) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Jiangling Motors Corporation:

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

0.028 = CN¥304m ÷ (CN¥28b - CN¥17b) (Based on the trailing twelve months to March 2024).

Thus, Jiangling Motors Corporation has an ROCE of 2.8%. Even though it's in line with the industry average of 2.9%, it's still a low return by itself.

Above you can see how the current ROCE for Jiangling Motors Corporation 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 Jiangling Motors Corporation for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Jiangling Motors Corporation is reaping rewards from its investments and has now broken into profitability. The company now earns 2.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Jiangling Motors Corporation has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, Jiangling Motors Corporation's current liabilities are still rather high at 61% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Jiangling Motors Corporation's ROCE

In summary, we're delighted to see that Jiangling Motors Corporation has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Jiangling Motors Corporation does have some risks though, and we've spotted 2 warning signs for Jiangling Motors Corporation that you might be interested in.

While Jiangling Motors Corporation 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.