There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Suzhou Douson Drilling & Production EquipmentLtd (SHSE:603800) looks quite promising in regards to its trends of return on capital.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Suzhou Douson Drilling & Production EquipmentLtd, this is the formula:

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

0.16 = CN¥244m ÷ (CN¥3.7b - CN¥2.2b) (Based on the trailing twelve months to March 2024).

So, Suzhou Douson Drilling & Production EquipmentLtd has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Energy Services industry.

In the above chart we have measured Suzhou Douson Drilling & Production EquipmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Suzhou Douson Drilling & Production EquipmentLtd for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Suzhou Douson Drilling & Production EquipmentLtd. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Suzhou Douson Drilling & Production EquipmentLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Suzhou Douson Drilling & Production EquipmentLtd has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Suzhou Douson Drilling & Production EquipmentLtd, we've discovered 3 warning signs that you should be aware of.

While Suzhou Douson Drilling & Production EquipmentLtd 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.