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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 VATS Liquor Chain Store Management (SZSE:300755), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for VATS Liquor Chain Store Management:

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

0.067 = CN¥263m ÷ (CN¥7.7b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

Therefore, VATS Liquor Chain Store Management has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

View our latest analysis for VATS Liquor Chain Store Management

In the above chart we have measured VATS Liquor Chain Store Management's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From VATS Liquor Chain Store Management's ROCE Trend?

On the surface, the trend of ROCE at VATS Liquor Chain Store Management doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 6.7%. 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, VATS Liquor Chain Store Management's current liabilities are still rather high at 48% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From VATS Liquor Chain Store Management's ROCE

Bringing it all together, while we're somewhat encouraged by VATS Liquor Chain Store Management's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 2 warning signs for VATS Liquor Chain Store Management you'll probably want to know about.

While VATS Liquor Chain Store Management 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.