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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at GuangDong ShaoNeng Group (SZSE:000601), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for GuangDong ShaoNeng Group:

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

0.0024 = CN¥26m ÷ (CN¥14b - CN¥3.0b) (Based on the trailing twelve months to September 2023).

Therefore, GuangDong ShaoNeng Group has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangDong ShaoNeng Group's ROCE against it's prior returns. If you'd like to look at how GuangDong ShaoNeng Group has performed in the past in other metrics, you can view this free graph of GuangDong ShaoNeng Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at GuangDong ShaoNeng Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From GuangDong ShaoNeng Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that GuangDong ShaoNeng Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 16% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 2 warning signs facing GuangDong ShaoNeng Group that you might find interesting.

While GuangDong ShaoNeng Group 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.