If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shanghai Waigaoqiao Free Trade Zone Group (SHSE:600648) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shanghai Waigaoqiao Free Trade Zone Group is:

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

0.059 = CN¥1.4b ÷ (CN¥44b - CN¥20b) (Based on the trailing twelve months to March 2024).

Therefore, Shanghai Waigaoqiao Free Trade Zone Group has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

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

What Does the ROCE Trend For Shanghai Waigaoqiao Free Trade Zone Group Tell Us?

When we looked at the ROCE trend at Shanghai Waigaoqiao Free Trade Zone Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Shanghai Waigaoqiao Free Trade Zone Group has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shanghai Waigaoqiao Free Trade Zone Group's ROCE

While returns have fallen for Shanghai Waigaoqiao Free Trade Zone Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 53% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Shanghai Waigaoqiao Free Trade Zone Group we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com