If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Tianjin You Fa Steel Pipe Group Stock (SHSE:601686) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Tianjin You Fa Steel Pipe Group Stock is:

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

0.079 = CN¥805m ÷ (CN¥19b - CN¥8.6b) (Based on the trailing twelve months to September 2023).

So, Tianjin You Fa Steel Pipe Group Stock has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 6.3% generated by the Metals and Mining industry, it's much better.

In the above chart we have measured Tianjin You Fa Steel Pipe Group Stock's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tianjin You Fa Steel Pipe Group Stock here for free.

What Can We Tell From Tianjin You Fa Steel Pipe Group Stock's ROCE Trend?

When we looked at the ROCE trend at Tianjin You Fa Steel Pipe Group Stock, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Tianjin You Fa Steel Pipe Group Stock's current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Tianjin You Fa Steel Pipe Group Stock's ROCE

We're a bit apprehensive about Tianjin You Fa Steel Pipe Group Stock because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 49% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Tianjin You Fa Steel Pipe Group Stock that we think you should be aware of.

While Tianjin You Fa Steel Pipe Group Stock 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.