If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Fujian Start GroupLtd's (SHSE:600734) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Fujian Start GroupLtd is:

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

0.21 = CN¥83m ÷ (CN¥955m - CN¥555m) (Based on the trailing twelve months to September 2023).

So, Fujian Start GroupLtd has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Tech industry average of 6.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Start GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fujian Start GroupLtd.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Fujian Start GroupLtd. The figures show that over the last five years, returns on capital have grown by 97%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Fujian Start GroupLtd appears to been achieving more with less, since the business is using 89% less capital to run its operation. Fujian Start GroupLtd may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 58% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In the end, Fujian Start GroupLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 61% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 2 warning signs for Fujian Start GroupLtd that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.