If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shandong Shuangyi Technology (SZSE:300690) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Shandong Shuangyi Technology is:

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

0.059 = CN¥85m ÷ (CN¥1.8b - CN¥335m) (Based on the trailing twelve months to March 2024).

So, Shandong Shuangyi Technology has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

Above you can see how the current ROCE for Shandong Shuangyi Technology 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 Shandong Shuangyi Technology for free.

How Are Returns Trending?

When we looked at the ROCE trend at Shandong Shuangyi Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 9.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Shandong Shuangyi Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shandong Shuangyi Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 30% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Shandong Shuangyi Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Shandong Shuangyi Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com