Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at China Railway Special Cargo Logistics (SZSE:001213), it didn't seem to tick all of these boxes.

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

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 China Railway Special Cargo Logistics is:

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

0.04 = CN¥770m ÷ (CN¥21b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

So, China Railway Special Cargo Logistics has an ROCE of 4.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Railway Special Cargo Logistics' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Railway Special Cargo Logistics.

What The Trend Of ROCE Can Tell Us

In terms of China Railway Special Cargo Logistics' historical ROCE trend, it doesn't exactly demand attention. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 4.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

As we've seen above, China Railway Special Cargo Logistics' returns on capital haven't increased but it is reinvesting in the business. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for China Railway Special Cargo Logistics you'll probably want to know about.

While China Railway Special Cargo Logistics 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