If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sichuan Xunyou Network Technology (SZSE:300467) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Sichuan Xunyou Network Technology, this is the formula:

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

0.078 = CN¥61m ÷ (CN¥953m - CN¥175m) (Based on the trailing twelve months to September 2023).

Therefore, Sichuan Xunyou Network Technology has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 3.8%.

Check out our latest analysis for Sichuan Xunyou Network Technology

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

What The Trend Of ROCE Can Tell Us

Over the past five years, Sichuan Xunyou Network Technology's ROCE has remained relatively flat while the business is using 76% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Bottom Line

In summary, Sichuan Xunyou Network Technology isn't reinvesting funds back into the business and returns aren't growing. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Sichuan Xunyou Network Technology and understanding this should be part of your investment process.

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.