There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Yibin Tianyuan Group (SZSE:002386), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Yibin Tianyuan Group:

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

0.018 = CN¥196m ÷ (CN¥19b - CN¥7.8b) (Based on the trailing twelve months to June 2023).

Thus, Yibin Tianyuan Group has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.9%.

Check out our latest analysis for Yibin Tianyuan Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yibin Tianyuan Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Yibin Tianyuan Group, check out these free graphs here.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 9.2% five years ago, while capital employed has grown 93%. Usually this isn't ideal, but given Yibin Tianyuan Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Yibin Tianyuan Group's earnings and if they change as a result from the capital raise.

On a side note, Yibin Tianyuan Group has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Yibin Tianyuan Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 33% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Yibin Tianyuan Group does have some risks though, and we've spotted 4 warning signs for Yibin Tianyuan Group that you might be interested in.

While Yibin Tianyuan Group 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.