To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Shandong Shanda OumasoftLTD (SZSE:301185) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Shandong Shanda OumasoftLTD, this is the formula:

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

0.058 = CN¥61m ÷ (CN¥1.1b - CN¥34m) (Based on the trailing twelve months to September 2024).

Therefore, Shandong Shanda OumasoftLTD has an ROCE of 5.8%. In absolute terms, that's a low return, but it's much better than the Software industry average of 2.3%.

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 Shandong Shanda OumasoftLTD's past further, check out this free graph covering Shandong Shanda OumasoftLTD's past earnings, revenue and cash flow.

What Can We Tell From Shandong Shanda OumasoftLTD's ROCE Trend?

When we looked at the ROCE trend at Shandong Shanda OumasoftLTD, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. 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 Shandong Shanda OumasoftLTD is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Shandong Shanda OumasoftLTD does have some risks though, and we've spotted 2 warning signs for Shandong Shanda OumasoftLTD that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.