If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Xiangtan Electric Manufacturing (SHSE:600416) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Xiangtan Electric Manufacturing:

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

0.024 = CN¥210m ÷ (CN¥14b - CN¥5.7b) (Based on the trailing twelve months to September 2024).

Therefore, Xiangtan Electric Manufacturing has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

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

How Are Returns Trending?

The fact that Xiangtan Electric Manufacturing is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Xiangtan Electric Manufacturing is utilizing 76% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 40%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Xiangtan Electric Manufacturing's ROCE

In summary, it's great to see that Xiangtan Electric Manufacturing has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 153% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Xiangtan Electric Manufacturing, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Xiangtan Electric Manufacturing may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.