If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Weibo (NASDAQ:WB) 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)?

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 Weibo is:

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

0.091 = US$476m ÷ (US$7.3b - US$2.0b) (Based on the trailing twelve months to March 2024).

So, Weibo has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Interactive Media and Services industry average of 6.4%.

Above you can see how the current ROCE for Weibo compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Weibo for free.

How Are Returns Trending?

We weren't thrilled with the trend because Weibo's ROCE has reduced by 59% over the last five years, while the business employed 84% more capital. That being said, Weibo raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Weibo probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

Our Take On Weibo's ROCE

Bringing it all together, while we're somewhat encouraged by Weibo's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 77% over the last five years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Weibo does have some risks though, and we've spotted 1 warning sign for Weibo 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com