There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Chengdu Xingrong Environment (SZSE:000598) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Chengdu Xingrong Environment:

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

0.066 = CN¥2.2b ÷ (CN¥42b - CN¥8.7b) (Based on the trailing twelve months to December 2023).

Thus, Chengdu Xingrong Environment has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 6.2%.

Above you can see how the current ROCE for Chengdu Xingrong Environment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chengdu Xingrong Environment .

What Can We Tell From Chengdu Xingrong Environment's ROCE Trend?

When we looked at the ROCE trend at Chengdu Xingrong Environment, we didn't gain much confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 6.6%. However it looks like Chengdu Xingrong Environment 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.

What We Can Learn From Chengdu Xingrong Environment's ROCE

In summary, Chengdu Xingrong Environment is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 54% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Chengdu Xingrong Environment that you might find interesting.

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.