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. 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. However, after briefly looking over the numbers, we don't think GRIPM Advanced Materials (SHSE:688456) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on GRIPM Advanced Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = CN¥20m ÷ (CN¥1.6b - CN¥388m) (Based on the trailing twelve months to March 2024).
Therefore, GRIPM Advanced Materials has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.
In the above chart we have measured GRIPM Advanced Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for GRIPM Advanced Materials .
So How Is GRIPM Advanced Materials' ROCE Trending?
On the surface, the trend of ROCE at GRIPM Advanced Materials doesn't inspire confidence. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 1.6%. However it looks like GRIPM Advanced Materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From GRIPM Advanced Materials' ROCE
To conclude, we've found that GRIPM Advanced Materials is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. 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.
If you'd like to know more about GRIPM Advanced Materials, we've spotted 3 warning signs, and 1 of them can't be ignored.
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.