Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 investigating Shenzhen Prince New MaterialsLtd (SZSE:002735), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Shenzhen Prince New MaterialsLtd:

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

0.048 = CN¥99m ÷ (CN¥2.9b - CN¥880m) (Based on the trailing twelve months to March 2024).

So, Shenzhen Prince New MaterialsLtd has an ROCE of 4.8%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

In the above chart we have measured Shenzhen Prince New MaterialsLtd'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 analyst report for Shenzhen Prince New MaterialsLtd .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Shenzhen Prince New MaterialsLtd's ROCE has reduced by 58% over the last five years, while the business employed 182% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Shenzhen Prince New MaterialsLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

In summary, Shenzhen Prince New MaterialsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Shenzhen Prince New MaterialsLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Shenzhen Prince New 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.