If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sanhe Tongfei Refrigeration (SZSE:300990) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sanhe Tongfei Refrigeration:

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

0.10 = CN¥176m ÷ (CN¥2.2b - CN¥441m) (Based on the trailing twelve months to September 2023).

Therefore, Sanhe Tongfei Refrigeration has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Machinery industry.

Above you can see how the current ROCE for Sanhe Tongfei Refrigeration compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Sanhe Tongfei Refrigeration's ROCE Trend?

In terms of Sanhe Tongfei Refrigeration's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 29% over the last five years. 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 On Sanhe Tongfei Refrigeration's ROCE

While returns have fallen for Sanhe Tongfei Refrigeration in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 48% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Sanhe Tongfei Refrigeration does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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.