To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Yueyang Xingchang Petro-Chemical (SZSE:000819), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Yueyang Xingchang Petro-Chemical is:

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

0.042 = CN¥102m ÷ (CN¥3.0b - CN¥517m) (Based on the trailing twelve months to September 2024).

Thus, Yueyang Xingchang Petro-Chemical has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.6%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Yueyang Xingchang Petro-Chemical's past further, check out this free graph covering Yueyang Xingchang Petro-Chemical's past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Yueyang Xingchang Petro-Chemical's ROCE has reduced by 47% over the last five years, while the business employed 195% more capital. That being said, Yueyang Xingchang Petro-Chemical raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Yueyang Xingchang Petro-Chemical probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On Yueyang Xingchang Petro-Chemical's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Yueyang Xingchang Petro-Chemical is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 114% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Yueyang Xingchang Petro-Chemical does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

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.