If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Jiangsu Tianmu Lake TourismLtd (SHSE:603136), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Jiangsu Tianmu Lake TourismLtd is:

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

0.12 = CN¥183m ÷ (CN¥1.8b - CN¥312m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu Tianmu Lake TourismLtd has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Hospitality industry.

In the above chart we have measured Jiangsu Tianmu Lake TourismLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Tianmu Lake TourismLtd .

So How Is Jiangsu Tianmu Lake TourismLtd's ROCE Trending?

On the surface, the trend of ROCE at Jiangsu Tianmu Lake TourismLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 16% five years ago. However it looks like Jiangsu Tianmu Lake TourismLtd 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Jiangsu Tianmu Lake TourismLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Tianmu Lake TourismLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 34% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Jiangsu Tianmu Lake TourismLtd does have some risks though, and we've spotted 1 warning sign for Jiangsu Tianmu Lake TourismLtd that you might be interested in.

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.