If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Tangshan Sunfar Silicon IndustriesLtd (SHSE:603938), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Tangshan Sunfar Silicon IndustriesLtd is:

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

0.031 = CN¥79m ÷ (CN¥3.3b - CN¥695m) (Based on the trailing twelve months to September 2024).

Therefore, Tangshan Sunfar Silicon IndustriesLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

Above you can see how the current ROCE for Tangshan Sunfar Silicon IndustriesLtd 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 Tangshan Sunfar Silicon IndustriesLtd .

So How Is Tangshan Sunfar Silicon IndustriesLtd's ROCE Trending?

When we looked at the ROCE trend at Tangshan Sunfar Silicon IndustriesLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Tangshan Sunfar Silicon IndustriesLtd's ROCE

We're a bit apprehensive about Tangshan Sunfar Silicon IndustriesLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 110% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing Tangshan Sunfar Silicon IndustriesLtd that you might find interesting.

While Tangshan Sunfar Silicon IndustriesLtd 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.