There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Ningxia Qinglong Pipes Industry Group (SZSE:002457) 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. To calculate this metric for Ningxia Qinglong Pipes Industry Group, this is the formula:

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

0.044 = CN¥114m ÷ (CN¥4.4b - CN¥1.8b) (Based on the trailing twelve months to June 2024).

So, Ningxia Qinglong Pipes Industry Group has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.7%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ningxia Qinglong Pipes Industry Group has performed in the past in other metrics, you can view this free graph of Ningxia Qinglong Pipes Industry Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Ningxia Qinglong Pipes Industry Group Tell Us?

In terms of Ningxia Qinglong Pipes Industry Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.1%, but since then they've fallen to 4.4%. However it looks like Ningxia Qinglong Pipes Industry Group 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Ningxia Qinglong Pipes Industry Group's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Ningxia Qinglong Pipes Industry Group's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 34% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about Ningxia Qinglong Pipes Industry Group, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

While Ningxia Qinglong Pipes Industry Group 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.

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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.