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. 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. Although, when we looked at Wencan Group (SHSE:603348), it didn't seem to tick all of these boxes.

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

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 Wencan Group:

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

0.025 = CN¥118m ÷ (CN¥7.5b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

Thus, Wencan Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.

View our latest analysis for Wencan Group

In the above chart we have measured Wencan Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wencan Group here for free.

So How Is Wencan Group's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 9.5% five years ago, while capital employed has grown 98%. Usually this isn't ideal, but given Wencan 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. Wencan Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Wencan Group's ROCE

To conclude, we've found that Wencan Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 88% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Wencan Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.