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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Changchun Engley Automobile IndustryLtd (SHSE:601279), it didn't seem to tick all of these boxes.

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

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. The formula for this calculation on Changchun Engley Automobile IndustryLtd is:

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

0.026 = CN¥148m ÷ (CN¥8.3b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

Therefore, Changchun Engley Automobile IndustryLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.9%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Changchun Engley Automobile IndustryLtd's past further, check out this free graph covering Changchun Engley Automobile IndustryLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 9.7% five years ago, while the business's capital employed increased by 44%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Changchun Engley Automobile IndustryLtd might not have received a full period of earnings contribution from it.

In Conclusion...

To conclude, we've found that Changchun Engley Automobile IndustryLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 63% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Changchun Engley Automobile IndustryLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.