There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Xiamen ITG GroupLtd (SHSE:600755), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Xiamen ITG GroupLtd, this is the formula:

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

0.022 = CN¥1.1b ÷ (CN¥122b - CN¥72b) (Based on the trailing twelve months to September 2024).

Therefore, Xiamen ITG GroupLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.0%.

Above you can see how the current ROCE for Xiamen ITG GroupLtd 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 Xiamen ITG GroupLtd .

What Can We Tell From Xiamen ITG GroupLtd's ROCE Trend?

We weren't thrilled with the trend because Xiamen ITG GroupLtd's ROCE has reduced by 71% over the last five years, while the business employed 43% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Xiamen ITG GroupLtd's earnings and if they change as a result from the capital raise.

Another thing to note, Xiamen ITG GroupLtd has a high ratio of current liabilities to total assets of 59%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Xiamen ITG GroupLtd have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 22% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing, we've spotted 3 warning signs facing Xiamen ITG GroupLtd that you might find interesting.

While Xiamen ITG GroupLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.