If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So, when we ran our eye over Sunresin New MaterialsLtd's (SZSE:300487) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sunresin New MaterialsLtd, this is the formula:

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

0.22 = CN¥934m ÷ (CN¥5.8b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

So, Sunresin New MaterialsLtd has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

Above you can see how the current ROCE for Sunresin New MaterialsLtd 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 Sunresin New MaterialsLtd for free.

What Can We Tell From Sunresin New MaterialsLtd's ROCE Trend?

It's hard not to be impressed by Sunresin New MaterialsLtd's returns on capital. The company has employed 179% more capital in the last five years, and the returns on that capital have remained stable at 22%. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Sunresin New MaterialsLtd can keep this up, we'd be very optimistic about its future.

The Bottom Line

In short, we'd argue Sunresin New MaterialsLtd has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 275% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Sunresin New MaterialsLtd does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.