Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Nanjing Xinjiekou Department Store (SHSE:600682), it didn't seem to tick all of these boxes.

Understanding 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 Nanjing Xinjiekou Department Store is:

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

0.035 = CN¥702m ÷ (CN¥26b - CN¥6.1b) (Based on the trailing twelve months to March 2024).

Thus, Nanjing Xinjiekou Department Store has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.5%.

In the above chart we have measured Nanjing Xinjiekou Department Store's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nanjing Xinjiekou Department Store .

How Are Returns Trending?

In terms of Nanjing Xinjiekou Department Store's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Nanjing Xinjiekou Department Store might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Nanjing Xinjiekou Department Store's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Nanjing Xinjiekou Department Store has the makings of a multi-bagger.

Nanjing Xinjiekou Department Store does have some risks though, and we've spotted 1 warning sign for Nanjing Xinjiekou Department Store that you might be interested in.

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.