Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangzhou Lushan New Materials (SHSE:603051), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Guangzhou Lushan New Materials, this is the formula:

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

0.023 = CN¥44m ÷ (CN¥2.7b - CN¥751m) (Based on the trailing twelve months to June 2024).

Thus, Guangzhou Lushan New Materials has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Lushan New Materials' ROCE against it's prior returns. If you'd like to look at how Guangzhou Lushan New Materials has performed in the past in other metrics, you can view this free graph of Guangzhou Lushan New Materials' past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangzhou Lushan New Materials Tell Us?

On the surface, the trend of ROCE at Guangzhou Lushan New Materials doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On Guangzhou Lushan New Materials' ROCE

Bringing it all together, while we're somewhat encouraged by Guangzhou Lushan New Materials' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 23% in the last year. Therefore based on the analysis done in this article, we don't think Guangzhou Lushan New Materials has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Guangzhou Lushan New Materials (including 2 which are a bit unpleasant) .

While Guangzhou Lushan New Materials 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.