If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Wuxi Double Elephant Micro Fibre MaterialLtd (SZSE:002395), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Wuxi Double Elephant Micro Fibre MaterialLtd, this is the formula:

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

0.035 = CN¥55m ÷ (CN¥2.2b - CN¥680m) (Based on the trailing twelve months to March 2024).

So, Wuxi Double Elephant Micro Fibre MaterialLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi Double Elephant Micro Fibre MaterialLtd's ROCE against it's prior returns. If you'd like to look at how Wuxi Double Elephant Micro Fibre MaterialLtd has performed in the past in other metrics, you can view this free graph of Wuxi Double Elephant Micro Fibre MaterialLtd's past earnings, revenue and cash flow.

What Can We Tell From Wuxi Double Elephant Micro Fibre MaterialLtd's ROCE Trend?

There are better returns on capital out there than what we're seeing at Wuxi Double Elephant Micro Fibre MaterialLtd. Over the past five years, ROCE has remained relatively flat at around 3.5% and the business has deployed 79% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, Wuxi Double Elephant Micro Fibre MaterialLtd's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Wuxi Double Elephant Micro Fibre MaterialLtd has the makings of a multi-bagger.

Wuxi Double Elephant Micro Fibre MaterialLtd does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.