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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Rongcheer Industrial Technology (Suzhou) (SZSE:301360) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Rongcheer Industrial Technology (Suzhou):

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

0.022 = CN¥25m ÷ (CN¥1.3b - CN¥167m) (Based on the trailing twelve months to March 2024).

So, Rongcheer Industrial Technology (Suzhou) has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Rongcheer Industrial Technology (Suzhou)'s past further, check out this free graph covering Rongcheer Industrial Technology (Suzhou)'s past earnings, revenue and cash flow.

So How Is Rongcheer Industrial Technology (Suzhou)'s ROCE Trending?

On the surface, the trend of ROCE at Rongcheer Industrial Technology (Suzhou) doesn't inspire confidence. To be more specific, ROCE has fallen from 43% over the last five years. However it looks like Rongcheer Industrial Technology (Suzhou) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Rongcheer Industrial Technology (Suzhou) has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Rongcheer Industrial Technology (Suzhou)'s ROCE

In summary, Rongcheer Industrial Technology (Suzhou) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Rongcheer Industrial Technology (Suzhou), we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.