If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kunshan Kinglai Hygienic MaterialsLtd's (SZSE:300260) returns on capital, so let's have a 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 Kunshan Kinglai Hygienic MaterialsLtd, this is the formula:

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

0.12 = CN¥307m ÷ (CN¥4.8b - CN¥2.3b) (Based on the trailing twelve months to September 2024).

Therefore, Kunshan Kinglai Hygienic MaterialsLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Machinery industry.

In the above chart we have measured Kunshan Kinglai Hygienic MaterialsLtd's 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 Kunshan Kinglai Hygienic MaterialsLtd for free.

The Trend Of ROCE

We like the trends that we're seeing from Kunshan Kinglai Hygienic MaterialsLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 177%. So we're very much inspired by what we're seeing at Kunshan Kinglai Hygienic MaterialsLtd thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Kunshan Kinglai Hygienic MaterialsLtd has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. 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 Bottom Line

To sum it up, Kunshan Kinglai Hygienic MaterialsLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 348% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Kunshan Kinglai Hygienic MaterialsLtd can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Kunshan Kinglai Hygienic MaterialsLtd we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.