Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Cscec Scimee Sci.&Tech.Ltd (SZSE:300425) 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)

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 Cscec Scimee Sci.&Tech.Ltd, this is the formula:

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

0.067 = CN¥199m ÷ (CN¥4.5b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

So, Cscec Scimee Sci.&Tech.Ltd has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Machinery 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 Cscec Scimee Sci.&Tech.Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Cscec Scimee Sci.&Tech.Ltd.

So How Is Cscec Scimee Sci.&Tech.Ltd's ROCE Trending?

In terms of Cscec Scimee Sci.&Tech.Ltd's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 6.7% and the business has deployed 55% 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 On Cscec Scimee Sci.&Tech.Ltd's ROCE

In summary, Cscec Scimee Sci.&Tech.Ltd has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 5.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Cscec Scimee Sci.&Tech.Ltd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Cscec Scimee Sci.&Tech.Ltd 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.