There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at Sichuan Injet Electric's (SZSE:300820) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sichuan Injet Electric:

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

0.23 = CN¥521m ÷ (CN¥4.0b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Thus, Sichuan Injet Electric has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

In the above chart we have measured Sichuan Injet Electric'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 Sichuan Injet Electric .

So How Is Sichuan Injet Electric's ROCE Trending?

We'd be pretty happy with returns on capital like Sichuan Injet Electric. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 409% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Sichuan Injet Electric can keep this up, we'd be very optimistic about its future.

Another thing to note, Sichuan Injet Electric has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 29% return if they held over the last three years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to know some of the risks facing Sichuan Injet Electric we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

Sichuan Injet Electric is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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