What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Jiangsu Evergreen New Material Technology (SHSE:603125), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Jiangsu Evergreen New Material Technology is:

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

0.095 = CN¥212m ÷ (CN¥2.3b - CN¥76m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Evergreen New Material Technology has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

In the above chart we have measured Jiangsu Evergreen New Material Technology'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 Jiangsu Evergreen New Material Technology for free.

What Can We Tell From Jiangsu Evergreen New Material Technology's ROCE Trend?

On the surface, the trend of ROCE at Jiangsu Evergreen New Material Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 23% five years ago. However it looks like Jiangsu Evergreen New Material Technology 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 related note, Jiangsu Evergreen New Material Technology has decreased its current liabilities to 3.3% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Jiangsu Evergreen New Material Technology's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 2 warning signs for Jiangsu Evergreen New Material Technology (1 is a bit unpleasant) you should be aware of.

While Jiangsu Evergreen New Material Technology 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.