Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Levima Advanced Materials (SZSE:003022) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Levima Advanced Materials:

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

0.025 = CN¥327m ÷ (CN¥19b - CN¥5.7b) (Based on the trailing twelve months to September 2024).

So, Levima Advanced Materials has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

In the above chart we have measured Levima Advanced Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Levima Advanced Materials for free.

What Can We Tell From Levima Advanced Materials' ROCE Trend?

On the surface, the trend of ROCE at Levima Advanced Materials doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.5%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Levima Advanced Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 69% in the last three years. Therefore based on the analysis done in this article, we don't think Levima Advanced Materials has the makings of a multi-bagger.

If you want to know some of the risks facing Levima Advanced Materials we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.