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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Queclink Wireless Solutions (SZSE:300590) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Queclink Wireless Solutions, this is the formula:

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

0.083 = CN¥153m ÷ (CN¥2.0b - CN¥142m) (Based on the trailing twelve months to September 2024).

Therefore, Queclink Wireless Solutions has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.1%.

In the above chart we have measured Queclink Wireless Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Queclink Wireless Solutions .

The Trend Of ROCE

On the surface, the trend of ROCE at Queclink Wireless Solutions doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.3%. 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.

Our Take On Queclink Wireless Solutions' ROCE

While returns have fallen for Queclink Wireless Solutions in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 13% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Queclink Wireless Solutions does have some risks though, and we've spotted 1 warning sign for Queclink Wireless Solutions that you might be interested in.

While Queclink Wireless Solutions may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.