There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Wuxi Huaguang Environment & Energy GroupLtd (SHSE:600475) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Wuxi Huaguang Environment & Energy GroupLtd:

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

0.039 = CN¥654m ÷ (CN¥26b - CN¥9.3b) (Based on the trailing twelve months to June 2024).

Thus, Wuxi Huaguang Environment & Energy GroupLtd has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Above you can see how the current ROCE for Wuxi Huaguang Environment & Energy GroupLtd 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 Wuxi Huaguang Environment & Energy GroupLtd for free.

What Does the ROCE Trend For Wuxi Huaguang Environment & Energy GroupLtd Tell Us?

In terms of Wuxi Huaguang Environment & Energy GroupLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.9% for the last five years, and the capital employed within the business has risen 169% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 36% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

As we've seen above, Wuxi Huaguang Environment & Energy GroupLtd's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 68% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Wuxi Huaguang Environment & Energy GroupLtd, we've spotted 3 warning signs, and 1 of them can't be ignored.

While Wuxi Huaguang Environment & Energy GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.