If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 briefly looking over the numbers, we don't think Guangdong Shenling Environmental Systems (SZSE:301018) 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)

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 Guangdong Shenling Environmental Systems:

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

0.022 = CN¥71m ÷ (CN¥5.2b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Guangdong Shenling Environmental Systems has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Building industry average of 7.5%.

Above you can see how the current ROCE for Guangdong Shenling Environmental Systems 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 Guangdong Shenling Environmental Systems for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Guangdong Shenling Environmental Systems doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Guangdong Shenling Environmental Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Guangdong Shenling Environmental Systems' ROCE

To conclude, we've found that Guangdong Shenling Environmental Systems is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Guangdong Shenling Environmental Systems, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Guangdong Shenling Environmental Systems 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.