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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Allmed Medical ProductsLtd (SZSE:002950) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Allmed Medical ProductsLtd:

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

0.059 = CN¥224m ÷ (CN¥5.1b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Therefore, Allmed Medical ProductsLtd 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 6.1%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Allmed Medical ProductsLtd's ROCE against it's prior returns. If you'd like to look at how Allmed Medical ProductsLtd has performed in the past in other metrics, you can view this free graph of Allmed Medical ProductsLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Allmed Medical ProductsLtd Tell Us?

On the surface, the trend of ROCE at Allmed Medical ProductsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 14% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Allmed Medical ProductsLtd's ROCE

In summary, we're somewhat concerned by Allmed Medical ProductsLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Allmed Medical ProductsLtd (at least 1 which is concerning) , and understanding these would certainly be useful.

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.