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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at China Tianrui Group Cement (HKG:1252) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 China Tianrui Group Cement:

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

0.045 = CN¥918m ÷ (CN¥33b - CN¥12b) (Based on the trailing twelve months to June 2023).

Thus, China Tianrui Group Cement has an ROCE of 4.5%. In absolute terms, that's a low return, but it's much better than the Basic Materials industry average of 3.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Tianrui Group Cement's ROCE against it's prior returns. If you're interested in investigating China Tianrui Group Cement's past further, check out this free graph covering China Tianrui Group Cement's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at China Tianrui Group Cement, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On China Tianrui Group Cement's ROCE

We're a bit apprehensive about China Tianrui Group Cement because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 18% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with China Tianrui Group Cement (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

While China Tianrui Group Cement 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.