Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shandong Kaisheng New MaterialsLtd (SZSE:301069) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shandong Kaisheng New MaterialsLtd, this is the formula:

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

0.041 = CN¥89m ÷ (CN¥2.5b - CN¥297m) (Based on the trailing twelve months to September 2024).

Thus, Shandong Kaisheng New MaterialsLtd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Kaisheng New MaterialsLtd's ROCE against it's prior returns. If you're interested in investigating Shandong Kaisheng New MaterialsLtd's past further, check out this free graph covering Shandong Kaisheng New MaterialsLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shandong Kaisheng New MaterialsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 20% five years ago. However it looks like Shandong Kaisheng New MaterialsLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shandong Kaisheng New MaterialsLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 71% over the last three 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.

On a final note, we found 4 warning signs for Shandong Kaisheng New MaterialsLtd (1 makes us a bit uncomfortable) you should be aware of.

While Shandong Kaisheng New 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.