If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. In light of that, when we looked at Shanghai Tunnel Engineering (SHSE:600820) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Tunnel Engineering, this is the formula:

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

0.028 = CN¥1.9b ÷ (CN¥164b - CN¥96b) (Based on the trailing twelve months to September 2024).

So, Shanghai Tunnel Engineering has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.1%.

In the above chart we have measured Shanghai Tunnel Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Tunnel Engineering .

How Are Returns Trending?

When we looked at the ROCE trend at Shanghai Tunnel Engineering, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.0% over the last five years. However it looks like Shanghai Tunnel Engineering 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.

On a side note, Shanghai Tunnel Engineering's current liabilities have increased over the last five years to 59% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shanghai Tunnel Engineering's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 34% 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.

On a final note, we found 2 warning signs for Shanghai Tunnel Engineering (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.