There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Anker Innovations (SZSE:300866), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Anker Innovations, this is the formula:

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

0.17 = CN¥1.7b ÷ (CN¥14b - CN¥4.4b) (Based on the trailing twelve months to June 2024).

So, Anker Innovations has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Tech industry average of 5.6% it's much better.

Above you can see how the current ROCE for Anker Innovations 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 Anker Innovations for free.

What Does the ROCE Trend For Anker Innovations Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 33% five years ago, while the business's capital employed increased by 469%. That being said, Anker Innovations raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Anker Innovations 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.

What We Can Learn From Anker Innovations' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Anker Innovations is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 11% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Anker Innovations 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.