If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Chongqing Wangbian Electric (Group) (SHSE:603191) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Chongqing Wangbian Electric (Group) is:

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

0.046 = CN¥171m ÷ (CN¥5.3b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

Therefore, Chongqing Wangbian Electric (Group) has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Above you can see how the current ROCE for Chongqing Wangbian Electric (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chongqing Wangbian Electric (Group) .

The Trend Of ROCE

When we looked at the ROCE trend at Chongqing Wangbian Electric (Group), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Chongqing Wangbian Electric (Group)'s ROCE

To conclude, we've found that Chongqing Wangbian Electric (Group) is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Chongqing Wangbian Electric (Group) has the makings of a multi-bagger.

Chongqing Wangbian Electric (Group) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Chongqing Wangbian Electric (Group) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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