If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Suzhou Nanomicro Technology (SHSE:688690) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Suzhou Nanomicro Technology is:

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

0.029 = CN¥60m ÷ (CN¥2.3b - CN¥235m) (Based on the trailing twelve months to March 2024).

Thus, Suzhou Nanomicro Technology has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

In the above chart we have measured Suzhou Nanomicro Technology'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 Suzhou Nanomicro Technology .

What Does the ROCE Trend For Suzhou Nanomicro Technology Tell Us?

In terms of Suzhou Nanomicro Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.7%, but since then they've fallen to 2.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Suzhou Nanomicro Technology's ROCE

In summary, we're somewhat concerned by Suzhou Nanomicro Technology's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 57% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Suzhou Nanomicro Technology that you might find interesting.

While Suzhou Nanomicro Technology 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.