If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Jiangsu Sanfame Polyester MaterialLtd (SHSE:600370), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jiangsu Sanfame Polyester MaterialLtd:

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

0.011 = CN¥103m ÷ (CN¥16b - CN¥6.3b) (Based on the trailing twelve months to September 2023).

Therefore, Jiangsu Sanfame Polyester MaterialLtd has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.1%.

Check out our latest analysis for Jiangsu Sanfame Polyester MaterialLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jiangsu Sanfame Polyester MaterialLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Sanfame Polyester MaterialLtd's ROCE Trend?

In terms of Jiangsu Sanfame Polyester MaterialLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.1% from 5.8% five years ago. 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.

On a side note, Jiangsu Sanfame Polyester MaterialLtd's current liabilities have increased over the last five years to 39% of total assets, effectively distorting the ROCE to some degree. 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

To conclude, we've found that Jiangsu Sanfame Polyester MaterialLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 10% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Jiangsu Sanfame Polyester MaterialLtd has the makings of a multi-bagger.

Jiangsu Sanfame Polyester MaterialLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are potentially serious...

While Jiangsu Sanfame Polyester MaterialLtd 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.