If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Liaoning Fu-An Heavy IndustryLtd (SHSE:603315) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Liaoning Fu-An Heavy IndustryLtd is:

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

0.053 = CN¥89m ÷ (CN¥2.9b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Thus, Liaoning Fu-An Heavy IndustryLtd has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

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'd like to look at how Liaoning Fu-An Heavy IndustryLtd has performed in the past in other metrics, you can view this free graph of Liaoning Fu-An Heavy IndustryLtd's past earnings, revenue and cash flow.

So How Is Liaoning Fu-An Heavy IndustryLtd's ROCE Trending?

In terms of Liaoning Fu-An Heavy IndustryLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Liaoning Fu-An Heavy IndustryLtd 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 may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

In summary, Liaoning Fu-An Heavy IndustryLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 12% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Liaoning Fu-An Heavy IndustryLtd has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Liaoning Fu-An Heavy IndustryLtd (including 1 which doesn't sit too well with us) .

While Liaoning Fu-An Heavy IndustryLtd 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.