If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China Resources Chemical Innovative Materials (SZSE:301090) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on China Resources Chemical Innovative Materials is:

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

0.073 = CN¥547m ÷ (CN¥10b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

Thus, China Resources Chemical Innovative Materials has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

See our latest analysis for China Resources Chemical Innovative Materials

Above you can see how the current ROCE for China Resources Chemical Innovative Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Resources Chemical Innovative Materials.

How Are Returns Trending?

When we looked at the ROCE trend at China Resources Chemical Innovative Materials, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 7.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, China Resources Chemical Innovative Materials has done well to pay down its current liabilities to 27% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From China Resources Chemical Innovative Materials' ROCE

Bringing it all together, while we're somewhat encouraged by China Resources Chemical Innovative Materials' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 2.0% in the last year to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, China Resources Chemical Innovative Materials does come with some risks, and we've found 1 warning sign that you should be aware of.

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.