What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Liaoning Cheng Da (SHSE:600739) 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. Analysts use this formula to calculate it for Liaoning Cheng Da:

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

0.0024 = CN¥90m ÷ (CN¥48b - CN¥10b) (Based on the trailing twelve months to June 2024).

Therefore, Liaoning Cheng Da has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liaoning Cheng Da's ROCE against it's prior returns. If you'd like to look at how Liaoning Cheng Da has performed in the past in other metrics, you can view this free graph of Liaoning Cheng Da's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Liaoning Cheng Da, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 2.5% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Liaoning Cheng Da's ROCE

To conclude, we've found that Liaoning Cheng Da is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 16% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Liaoning Cheng Da does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

While Liaoning Cheng Da 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.