If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Songcheng Performance DevelopmentLtd (SZSE:300144) 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 Songcheng Performance DevelopmentLtd:

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

0.14 = CN¥1.2b ÷ (CN¥9.4b - CN¥785m) (Based on the trailing twelve months to March 2024).

So, Songcheng Performance DevelopmentLtd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 11% it's much better.

In the above chart we have measured Songcheng Performance DevelopmentLtd'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 Songcheng Performance DevelopmentLtd .

So How Is Songcheng Performance DevelopmentLtd's ROCE Trending?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 22% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

The Bottom Line

It's a shame to see that Songcheng Performance DevelopmentLtd is effectively shrinking in terms of its capital base. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Songcheng Performance DevelopmentLtd does have some risks though, and we've spotted 3 warning signs for Songcheng Performance DevelopmentLtd that you might be interested in.

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