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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangsu HHCK Advanced MaterialsLtd (SHSE:688535) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Jiangsu HHCK Advanced MaterialsLtd, this is the formula:

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

0.021 = CN¥22m ÷ (CN¥1.2b - CN¥181m) (Based on the trailing twelve months to June 2024).

Thus, Jiangsu HHCK Advanced MaterialsLtd has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.3%.

In the above chart we have measured Jiangsu HHCK Advanced MaterialsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu HHCK Advanced MaterialsLtd .

What Does the ROCE Trend For Jiangsu HHCK Advanced MaterialsLtd Tell Us?

There are better returns on capital out there than what we're seeing at Jiangsu HHCK Advanced MaterialsLtd. The company has employed 1,114% more capital in the last five years, and the returns on that capital have remained stable at 2.1%. 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.

On a side note, Jiangsu HHCK Advanced MaterialsLtd has done well to reduce current liabilities to 15% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

As we've seen above, Jiangsu HHCK Advanced MaterialsLtd's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 6.7% in the last year to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 1 warning sign with Jiangsu HHCK Advanced MaterialsLtd and understanding it should be part of your investment process.

While Jiangsu HHCK Advanced MaterialsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.