What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Grandblue Environment (SHSE:600323) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Grandblue Environment:

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

0.081 = CN¥2.3b ÷ (CN¥37b - CN¥9.5b) (Based on the trailing twelve months to September 2024).

Thus, Grandblue Environment has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 6.8%.

In the above chart we have measured Grandblue Environment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Grandblue Environment .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Grandblue Environment. The company has consistently earned 8.1% for the last five years, and the capital employed within the business has risen 97% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Grandblue Environment's ROCE

In conclusion, Grandblue Environment has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 35% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Grandblue Environment we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Grandblue Environment 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.