Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangsu Cnano Technology (SHSE:688116), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jiangsu Cnano Technology, this is the formula:

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

0.073 = CN¥303m ÷ (CN¥5.1b - CN¥936m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Cnano Technology has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

Above you can see how the current ROCE for Jiangsu Cnano 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 Jiangsu Cnano Technology .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Jiangsu Cnano Technology. Over the past five years, ROCE has remained relatively flat at around 7.3% and the business has deployed 154% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 18% of total assets, this reported ROCE would probably be less than7.3% because total capital employed would be higher.The 7.3% ROCE could be even lower if current liabilities weren't 18% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From Jiangsu Cnano Technology's ROCE

Long story short, while Jiangsu Cnano Technology has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 56% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Jiangsu Cnano Technology, we've discovered 2 warning signs that you should be aware of.

While Jiangsu Cnano Technology 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.