If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after investigating Fujian Supertch Advanced MaterialLtd (SHSE:688398), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Fujian Supertch Advanced MaterialLtd, this is the formula:

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

0.07 = CN¥74m ÷ (CN¥1.2b - CN¥177m) (Based on the trailing twelve months to June 2023).

So, Fujian Supertch Advanced MaterialLtd has an ROCE of 7.0%. On its own, that's a low figure but it's around the 6.5% average generated by the Machinery industry.

View our latest analysis for Fujian Supertch Advanced MaterialLtd

Above you can see how the current ROCE for Fujian Supertch Advanced MaterialLtd 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 Fujian Supertch Advanced MaterialLtd here for free.

What Does the ROCE Trend For Fujian Supertch Advanced MaterialLtd Tell Us?

When we looked at the ROCE trend at Fujian Supertch Advanced MaterialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 7.0%. However it looks like Fujian Supertch Advanced MaterialLtd 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.

On a side note, Fujian Supertch Advanced MaterialLtd has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Fujian Supertch Advanced MaterialLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Fujian Supertch Advanced MaterialLtd's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Fujian Supertch Advanced MaterialLtd has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Fujian Supertch Advanced MaterialLtd you'll probably want to know about.

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.