If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Xiangtan Electric Manufacturing (SHSE:600416) so let's look a bit deeper.

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. The formula for this calculation on Xiangtan Electric Manufacturing is:

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

0.036 = CN¥309m ÷ (CN¥14b - CN¥5.2b) (Based on the trailing twelve months to September 2023).

Therefore, Xiangtan Electric Manufacturing has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

See our latest analysis for Xiangtan Electric Manufacturing

Above you can see how the current ROCE for Xiangtan Electric Manufacturing compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Xiangtan Electric Manufacturing.

So How Is Xiangtan Electric Manufacturing's ROCE Trending?

Xiangtan Electric Manufacturing has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 3.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Xiangtan Electric Manufacturing has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

One more thing to note, Xiangtan Electric Manufacturing has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To sum it up, Xiangtan Electric Manufacturing is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Xiangtan Electric Manufacturing can keep these trends up, it could have a bright future ahead.

Xiangtan Electric Manufacturing does have some risks though, and we've spotted 1 warning sign for Xiangtan Electric Manufacturing that you might be interested in.

While Xiangtan Electric Manufacturing 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.