What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Changqing Machinery (SHSE:603768) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Changqing Machinery:

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

0.069 = CN¥170m ÷ (CN¥4.9b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

Thus, Changqing Machinery has an ROCE of 6.9%. On its own, that's a low figure but it's around the 5.8% average generated by the Auto Components industry.

See our latest analysis for Changqing Machinery

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

What Does the ROCE Trend For Changqing Machinery Tell Us?

In terms of Changqing Machinery's historical ROCE trend, it doesn't exactly demand attention. The company has employed 33% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 50% of total assets, this reported ROCE would probably be less than6.9% because total capital employed would be higher.The 6.9% ROCE could be even lower if current liabilities weren't 50% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Key Takeaway

In summary, Changqing Machinery has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 3 warning signs with Changqing Machinery and understanding these should be part of your investment process.

While Changqing Machinery isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.