To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Songcheng Performance DevelopmentLtd (SZSE:300144), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Songcheng Performance DevelopmentLtd:

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

0.13 = CN¥1.2b ÷ (CN¥9.8b - CN¥701m) (Based on the trailing twelve months to September 2024).

Therefore, Songcheng Performance DevelopmentLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Hospitality industry.

Above you can see how the current ROCE for Songcheng Performance DevelopmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Songcheng Performance DevelopmentLtd .

What Does the ROCE Trend For Songcheng Performance DevelopmentLtd Tell Us?

Over the past five years, Songcheng Performance DevelopmentLtd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Songcheng Performance DevelopmentLtd to be a multi-bagger going forward.

In Conclusion...

In a nutshell, Songcheng Performance DevelopmentLtd has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. 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.

One more thing, we've spotted 3 warning signs facing Songcheng Performance DevelopmentLtd that you might find interesting.

While Songcheng Performance DevelopmentLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.