What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Shandong Weigao Orthopaedic Device (SHSE:688161), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Shandong Weigao Orthopaedic Device, this is the formula:

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

0.032 = CN¥130m ÷ (CN¥5.2b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

Therefore, Shandong Weigao Orthopaedic Device has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.2%.

In the above chart we have measured Shandong Weigao Orthopaedic Device's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shandong Weigao Orthopaedic Device for free.

So How Is Shandong Weigao Orthopaedic Device's ROCE Trending?

In terms of Shandong Weigao Orthopaedic Device's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Shandong Weigao Orthopaedic Device's ROCE

We're a bit apprehensive about Shandong Weigao Orthopaedic Device because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last year have experienced a 51% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing Shandong Weigao Orthopaedic Device that you might find interesting.

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.

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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.