To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Kunming Chuan Jin Nuo Chemical (SZSE:300505), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Kunming Chuan Jin Nuo Chemical, this is the formula:

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

0.052 = CN¥138m ÷ (CN¥3.6b - CN¥938m) (Based on the trailing twelve months to September 2024).

So, Kunming Chuan Jin Nuo Chemical has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kunming Chuan Jin Nuo Chemical's ROCE against it's prior returns. If you'd like to look at how Kunming Chuan Jin Nuo Chemical has performed in the past in other metrics, you can view this free graph of Kunming Chuan Jin Nuo Chemical's past earnings, revenue and cash flow.

What Can We Tell From Kunming Chuan Jin Nuo Chemical's ROCE Trend?

In terms of Kunming Chuan Jin Nuo Chemical's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Kunming Chuan Jin Nuo Chemical's current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Kunming Chuan Jin Nuo Chemical is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 40% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Kunming Chuan Jin Nuo Chemical does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

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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.