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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Suzhou Recodeal Interconnect SystemLtd (SHSE:688800), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Suzhou Recodeal Interconnect SystemLtd:

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

0.063 = CN¥133m ÷ (CN¥3.3b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

Therefore, Suzhou Recodeal Interconnect SystemLtd has an ROCE of 6.3%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

View our latest analysis for Suzhou Recodeal Interconnect SystemLtd

In the above chart we have measured Suzhou Recodeal Interconnect SystemLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Suzhou Recodeal Interconnect SystemLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Suzhou Recodeal Interconnect SystemLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Suzhou Recodeal Interconnect SystemLtd's ROCE

To conclude, we've found that Suzhou Recodeal Interconnect SystemLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 identified 4 warning signs with Suzhou Recodeal Interconnect SystemLtd (at least 1 which is significant) , and understanding them would certainly be useful.

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.