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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Espressif Systems (Shanghai) (SHSE:688018) 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 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 Espressif Systems (Shanghai):

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

0.041 = CN¥81m ÷ (CN¥2.1b - CN¥180m) (Based on the trailing twelve months to March 2024).

Therefore, Espressif Systems (Shanghai) has an ROCE of 4.1%. Even though it's in line with the industry average of 3.9%, it's still a low return by itself.

In the above chart we have measured Espressif Systems (Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Espressif Systems (Shanghai) .

So How Is Espressif Systems (Shanghai)'s ROCE Trending?

On the surface, the trend of ROCE at Espressif Systems (Shanghai) doesn't inspire confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 4.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Espressif Systems (Shanghai)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Espressif Systems (Shanghai). And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Espressif Systems (Shanghai), you might be interested to know about the 1 warning sign that our analysis has discovered.

While Espressif Systems (Shanghai) 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.