To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Science Environmental Protection (SHSE:688480) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Science Environmental Protection is:

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

0.05 = CN¥51m ÷ (CN¥1.4b - CN¥341m) (Based on the trailing twelve months to September 2023).

Thus, Science Environmental Protection has an ROCE of 5.0%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Check out our latest analysis for Science Environmental Protection

Above you can see how the current ROCE for Science Environmental Protection compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Science Environmental Protection here for free.

What Does the ROCE Trend For Science Environmental Protection Tell Us?

In terms of Science Environmental Protection's historical ROCE trend, it doesn't exactly demand attention. Over the past four years, ROCE has remained relatively flat at around 5.0% and the business has deployed 123% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Science Environmental Protection has done well to reduce current liabilities to 25% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

As we've seen above, Science Environmental Protection's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 36% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Science Environmental Protection, we've discovered 2 warning signs that you should be aware of.

While Science Environmental Protection isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.