What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Changsha DIALINE New Material Sci.&Tech (SZSE:300700) 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Changsha DIALINE New Material Sci.&Tech, this is the formula:

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

0.16 = CN¥227m ÷ (CN¥2.0b - CN¥599m) (Based on the trailing twelve months to September 2023).

Thus, Changsha DIALINE New Material Sci.&Tech has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Machinery industry.

Check out our latest analysis for Changsha DIALINE New Material Sci.&Tech

In the above chart we have measured Changsha DIALINE New Material Sci.&Tech'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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 20% five years ago, while the business's capital employed increased by 136%. That being said, Changsha DIALINE New Material Sci.&Tech raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Changsha DIALINE New Material Sci.&Tech might not have received a full period of earnings contribution from it.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Changsha DIALINE New Material Sci.&Tech. And the stock has followed suit returning a meaningful 75% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Changsha DIALINE New Material Sci.&Tech we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Changsha DIALINE New Material Sci.&Tech 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.