If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Chongqing Xishan Science & Technology's (SHSE:688576) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chongqing Xishan Science & Technology is:

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

0.039 = CN¥81m ÷ (CN¥2.2b - CN¥156m) (Based on the trailing twelve months to June 2024).

Therefore, Chongqing Xishan Science & Technology has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 5.8%.

Above you can see how the current ROCE for Chongqing Xishan Science & Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chongqing Xishan Science & Technology .

What Can We Tell From Chongqing Xishan Science & Technology's ROCE Trend?

The fact that Chongqing Xishan Science & Technology is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 3.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Chongqing Xishan Science & Technology is utilizing 4,347% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 7.0%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Chongqing Xishan Science & Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Chongqing Xishan Science & Technology's ROCE

In summary, it's great to see that Chongqing Xishan Science & Technology has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 29% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for Chongqing Xishan Science & Technology (1 doesn't sit too well with us) you should be aware of.

While Chongqing Xishan Science & Technology 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.