What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Chase Science (SZSE:300941), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Chase Science, this is the formula:

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

0.037 = CN¥48m ÷ (CN¥1.4b - CN¥66m) (Based on the trailing twelve months to March 2024).

So, Chase Science has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

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

So How Is Chase Science's ROCE Trending?

When we looked at the ROCE trend at Chase Science, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Chase Science has done well to pay down its current liabilities to 4.8% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by Chase Science's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 52% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Chase Science, we've spotted 3 warning signs, and 1 of them is significant.

While Chase Science may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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