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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Lotus Health Group (SHSE:600186) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lotus Health Group is:

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

0.11 = CN¥174m ÷ (CN¥2.7b - CN¥1.0b) (Based on the trailing twelve months to March 2024).

So, Lotus Health Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.6% it's much better.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Lotus Health Group has performed in the past in other metrics, you can view this free graph of Lotus Health Group's past earnings, revenue and cash flow.

What Can We Tell From Lotus Health Group's ROCE Trend?

Lotus Health Group has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 11% on its capital. In addition to that, Lotus Health Group is employing 1,426% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Lotus Health Group has decreased current liabilities to 39% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Lotus Health Group's ROCE

Long story short, we're delighted to see that Lotus Health Group's reinvestment activities have paid off and the company is now profitable. And a remarkable 235% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Lotus Health Group can keep these trends up, it could have a bright future ahead.

While Lotus Health Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for 600186 helps visualize whether it is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.