If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating GRIPM Advanced Materials (SHSE:688456), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for GRIPM Advanced Materials:

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

0.015 = CN¥18m ÷ (CN¥1.7b - CN¥443m) (Based on the trailing twelve months to June 2024).

Therefore, GRIPM Advanced Materials has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.0%.

Above you can see how the current ROCE for GRIPM Advanced Materials 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 GRIPM Advanced Materials for free.

So How Is GRIPM Advanced Materials' ROCE Trending?

In terms of GRIPM Advanced Materials' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.5% from 9.0% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that GRIPM Advanced Materials is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 16% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, GRIPM Advanced Materials does come with some risks, and we've found 1 warning sign that you should be aware of.

While GRIPM Advanced Materials 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.