There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Fsilon Furnishing and Construction Materials (SHSE:605318) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Fsilon Furnishing and Construction Materials, this is the formula:

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

0.015 = CN¥12m ÷ (CN¥1.1b - CN¥293m) (Based on the trailing twelve months to September 2024).

Therefore, Fsilon Furnishing and Construction Materials has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.6%.

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're interested in investigating Fsilon Furnishing and Construction Materials' past further, check out this free graph covering Fsilon Furnishing and Construction Materials' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fsilon Furnishing and Construction Materials doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Fsilon Furnishing and Construction Materials 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.

What We Can Learn From Fsilon Furnishing and Construction Materials' ROCE

To conclude, we've found that Fsilon Furnishing and Construction Materials is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 43% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 3 warning signs we've spotted with Fsilon Furnishing and Construction Materials (including 2 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.