There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Changzhou Shichuang EnergyLtd (SHSE:688429) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Changzhou Shichuang EnergyLtd is:

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

0.017 = CN¥41m ÷ (CN¥4.0b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

Thus, Changzhou Shichuang EnergyLtd has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 3.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Shichuang EnergyLtd's ROCE against it's prior returns. If you'd like to look at how Changzhou Shichuang EnergyLtd has performed in the past in other metrics, you can view this free graph of Changzhou Shichuang EnergyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Changzhou Shichuang EnergyLtd Tell Us?

When we looked at the ROCE trend at Changzhou Shichuang EnergyLtd, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 1.7% from 34% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Changzhou Shichuang EnergyLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Changzhou Shichuang EnergyLtd we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com