There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Xinxiang Chemical Fiber (SZSE:000949) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Xinxiang Chemical Fiber, this is the formula:

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

0.019 = CN¥155m ÷ (CN¥12b - CN¥3.9b) (Based on the trailing twelve months to March 2024).

So, Xinxiang Chemical Fiber has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinxiang Chemical Fiber'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 Xinxiang Chemical Fiber.

What Can We Tell From Xinxiang Chemical Fiber's ROCE Trend?

In terms of Xinxiang Chemical Fiber's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.3%, but since then they've fallen to 1.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Xinxiang Chemical Fiber's ROCE

To conclude, we've found that Xinxiang Chemical Fiber is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Xinxiang Chemical Fiber does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

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.