To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Chongqing Sanfeng Environment Group (SHSE:601827), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Chongqing Sanfeng Environment Group, this is the formula:

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

0.086 = CN¥1.7b ÷ (CN¥25b - CN¥4.8b) (Based on the trailing twelve months to September 2023).

Therefore, Chongqing Sanfeng Environment Group has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.6% generated by the Renewable Energy industry, it's much better.

See our latest analysis for Chongqing Sanfeng Environment Group

In the above chart we have measured Chongqing Sanfeng Environment Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chongqing Sanfeng Environment Group.

So How Is Chongqing Sanfeng Environment Group's ROCE Trending?

In terms of Chongqing Sanfeng Environment Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 148% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Chongqing Sanfeng Environment Group's ROCE

In summary, Chongqing Sanfeng Environment Group has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 14% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 2 warning signs with Chongqing Sanfeng Environment Group and understanding these should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.