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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Chengdu Leejun Industrial (SZSE:002651) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Chengdu Leejun Industrial:

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

0.063 = CN¥177m ÷ (CN¥3.3b - CN¥555m) (Based on the trailing twelve months to March 2024).

So, Chengdu Leejun Industrial has an ROCE of 6.3%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chengdu Leejun Industrial's ROCE against it's prior returns. If you're interested in investigating Chengdu Leejun Industrial's past further, check out this free graph covering Chengdu Leejun Industrial's past earnings, revenue and cash flow.

What Can We Tell From Chengdu Leejun Industrial's ROCE Trend?

There are better returns on capital out there than what we're seeing at Chengdu Leejun Industrial. The company has consistently earned 6.3% for the last five years, and the capital employed within the business has risen 32% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while Chengdu Leejun Industrial has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Chengdu Leejun Industrial, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.