What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Chongqing Sanfeng Environment Group (SHSE:601827) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Chongqing Sanfeng Environment Group, this is the formula:

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

0.078 = CN¥1.6b ÷ (CN¥26b - CN¥5.7b) (Based on the trailing twelve months to March 2024).

Therefore, Chongqing Sanfeng Environment Group has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 5.9%.

In the above chart we have measured Chongqing Sanfeng Environment Group'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 Chongqing Sanfeng Environment Group .

What Does the ROCE Trend For Chongqing Sanfeng Environment Group Tell Us?

The returns on capital haven't changed much for Chongqing Sanfeng Environment Group in recent years. The company has employed 127% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Chongqing Sanfeng Environment Group's ROCE

Long story short, while Chongqing Sanfeng Environment Group has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 11% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Chongqing Sanfeng Environment Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Chongqing Sanfeng Environment 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.

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