Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think CMST DevelopmentLtd (SHSE:600787) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on CMST DevelopmentLtd is:

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

0.024 = CN¥429m ÷ (CN¥24b - CN¥6.5b) (Based on the trailing twelve months to September 2023).

Therefore, CMST DevelopmentLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 7.3%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating CMST DevelopmentLtd's past further, check out this free graph covering CMST DevelopmentLtd's past earnings, revenue and cash flow.

So How Is CMST DevelopmentLtd's ROCE Trending?

In terms of CMST DevelopmentLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.4% for the last five years, and the capital employed within the business has risen 41% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, CMST DevelopmentLtd has done well to reduce current liabilities to 27% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In summary, CMST DevelopmentLtd has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

CMST DevelopmentLtd does have some risks though, and we've spotted 2 warning signs for CMST DevelopmentLtd that you might be interested in.

While CMST DevelopmentLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.