Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Fujian Wanchen Biotechnology Group (SZSE:300972) 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. Analysts use this formula to calculate it for Fujian Wanchen Biotechnology Group:

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

0.01 = CN¥16m ÷ (CN¥4.4b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

Thus, Fujian Wanchen Biotechnology Group has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

In the above chart we have measured Fujian Wanchen Biotechnology Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Fujian Wanchen Biotechnology Group .

What Does the ROCE Trend For Fujian Wanchen Biotechnology Group Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 8.8% five years ago, while the business's capital employed increased by 245%. That being said, Fujian Wanchen Biotechnology Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Fujian Wanchen Biotechnology Group might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 64%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.0%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Fujian Wanchen Biotechnology Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fujian Wanchen Biotechnology Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 22% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing Fujian Wanchen Biotechnology Group that you might find interesting.

While Fujian Wanchen Biotechnology Group 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.