Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangsu United Water TechnologyLtd (SHSE:603291), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangsu United Water TechnologyLtd, this is the formula:

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

0.057 = CN¥169m ÷ (CN¥3.7b - CN¥741m) (Based on the trailing twelve months to September 2024).

So, Jiangsu United Water TechnologyLtd has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu United Water TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Jiangsu United Water TechnologyLtd has performed in the past in other metrics, you can view this free graph of Jiangsu United Water TechnologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu United Water TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 5.7% from 9.8% four years ago. However it looks like Jiangsu United Water TechnologyLtd 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.

The Key Takeaway

In summary, Jiangsu United Water TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 28% over the last year, investors may not be too optimistic on this trend improving either. 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.

Jiangsu United Water TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Jiangsu United Water TechnologyLtd that you might be interested in.

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.