If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Cangzhou Mingzhu PlasticLtd (SZSE:002108), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Cangzhou Mingzhu PlasticLtd:

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

0.0081 = CN¥50m ÷ (CN¥7.4b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

So, Cangzhou Mingzhu PlasticLtd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.2%.

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

The Trend Of ROCE

In terms of Cangzhou Mingzhu PlasticLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.0%, but since then they've fallen to 0.8%. However it looks like Cangzhou Mingzhu PlasticLtd 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'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.

Our Take On Cangzhou Mingzhu PlasticLtd's ROCE

To conclude, we've found that Cangzhou Mingzhu PlasticLtd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 21% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Cangzhou Mingzhu PlasticLtd (of which 1 is concerning!) that you should know about.

While Cangzhou Mingzhu PlasticLtd 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.