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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Venustech Group (SZSE:002439) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Venustech Group is:

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

0.038 = CN¥444m ÷ (CN¥14b - CN¥2.1b) (Based on the trailing twelve months to June 2024).

So, Venustech Group has an ROCE of 3.8%. On its own that's a low return, but compared to the average of 2.9% generated by the Software industry, it's much better.

Above you can see how the current ROCE for Venustech Group 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 Venustech Group .

So How Is Venustech Group's ROCE Trending?

We weren't thrilled with the trend because Venustech Group's ROCE has reduced by 66% over the last five years, while the business employed 153% more capital. That being said, Venustech Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Venustech Group's earnings and if they change as a result from the capital raise.

In Conclusion...

To conclude, we've found that Venustech Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 60% in the last five years. Therefore based on the analysis done in this article, we don't think Venustech Group has the makings of a multi-bagger.

Venustech Group does have some risks though, and we've spotted 4 warning signs for Venustech Group 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.