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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Chengdu Fusen Noble-House IndustrialLtd (SZSE:002818) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Chengdu Fusen Noble-House IndustrialLtd:

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

0.15 = CN¥897m ÷ (CN¥7.1b - CN¥905m) (Based on the trailing twelve months to December 2023).

So, Chengdu Fusen Noble-House IndustrialLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 4.3% generated by the Specialty Retail industry.

Above you can see how the current ROCE for Chengdu Fusen Noble-House IndustrialLtd 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 analyst report for Chengdu Fusen Noble-House IndustrialLtd .

What The Trend Of ROCE Can Tell Us

In terms of Chengdu Fusen Noble-House IndustrialLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 19% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Chengdu Fusen Noble-House IndustrialLtd's ROCE

In summary, Chengdu Fusen Noble-House IndustrialLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 33% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Chengdu Fusen Noble-House IndustrialLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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