If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Chemclin Diagnostics' (SHSE:688468) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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 Chemclin Diagnostics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥135m ÷ (CN¥1.8b - CN¥184m) (Based on the trailing twelve months to March 2024).
So, Chemclin Diagnostics has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 6.3%.
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 Chemclin Diagnostics' past further, check out this free graph covering Chemclin Diagnostics' past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that Chemclin Diagnostics is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 8.2% on its capital. In addition to that, Chemclin Diagnostics is employing 104% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In Conclusion...
To the delight of most shareholders, Chemclin Diagnostics has now broken into profitability. And since the stock has dived 72% over the last three years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
Chemclin Diagnostics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
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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