Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Advanced Fiber Resources (Zhuhai) (SZSE:300620) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Advanced Fiber Resources (Zhuhai) is:

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

0.029 = CN¥60m ÷ (CN¥2.6b - CN¥502m) (Based on the trailing twelve months to June 2024).

So, Advanced Fiber Resources (Zhuhai) has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.2%.

Above you can see how the current ROCE for Advanced Fiber Resources (Zhuhai) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Advanced Fiber Resources (Zhuhai) .

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 8.1% five years ago, while the business's capital employed increased by 236%. That being said, Advanced Fiber Resources (Zhuhai) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Advanced Fiber Resources (Zhuhai) probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

While returns have fallen for Advanced Fiber Resources (Zhuhai) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 129% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Advanced Fiber Resources (Zhuhai) does have some risks though, and we've spotted 1 warning sign for Advanced Fiber Resources (Zhuhai) 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.