If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Penyao Environmental Protection (SZSE:300664), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Penyao Environmental Protection, this is the formula:

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

0.067 = CN¥370m ÷ (CN¥7.9b - CN¥2.4b) (Based on the trailing twelve months to September 2024).

So, Penyao Environmental Protection has an ROCE of 6.7%. On its own that's a low return, but compared to the average of 5.3% generated by the Commercial Services industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Penyao Environmental Protection's ROCE against it's prior returns. If you're interested in investigating Penyao Environmental Protection's past further, check out this free graph covering Penyao Environmental Protection's past earnings, revenue and cash flow.

What Does the ROCE Trend For Penyao Environmental Protection Tell Us?

There are better returns on capital out there than what we're seeing at Penyao Environmental Protection. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 6.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Penyao Environmental Protection has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Penyao Environmental Protection (of which 1 is concerning!) that you should know about.

While Penyao Environmental Protection isn't earning the highest return, check out this free list of companies that are 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.