If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 investigating Fuxin Dare Automotive Parts (SZSE:300473), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Fuxin Dare Automotive Parts:

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

0.046 = CN¥98m ÷ (CN¥4.1b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

So, Fuxin Dare Automotive Parts has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fuxin Dare Automotive Parts' ROCE against it's prior returns. If you're interested in investigating Fuxin Dare Automotive Parts' past further, check out this free graph covering Fuxin Dare Automotive Parts' past earnings, revenue and cash flow.

What Can We Tell From Fuxin Dare Automotive Parts' ROCE Trend?

We're a bit concerned with the trends, because the business is applying 42% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 48% of total assets, this reported ROCE would probably be less than4.6% because total capital employed would be higher.The 4.6% ROCE could be even lower if current liabilities weren't 48% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Fuxin Dare Automotive Parts' ROCE

In summary, Fuxin Dare Automotive Parts isn't reinvesting funds back into the business and returns aren't growing. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Fuxin Dare Automotive Parts has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Fuxin Dare Automotive Parts (including 1 which doesn't sit too well with us) .

While Fuxin Dare Automotive Parts 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.