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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ShenZhen Woer Heat-Shrinkable MaterialLtd is:

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

0.16 = CN¥1.1b ÷ (CN¥9.8b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

Thus, ShenZhen Woer Heat-Shrinkable MaterialLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.8% it's much better.

In the above chart we have measured ShenZhen Woer Heat-Shrinkable MaterialLtd'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 ShenZhen Woer Heat-Shrinkable MaterialLtd for free.

How Are Returns Trending?

The trends we've noticed at ShenZhen Woer Heat-Shrinkable MaterialLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 71% more capital is being employed now too. So we're very much inspired by what we're seeing at ShenZhen Woer Heat-Shrinkable MaterialLtd thanks to its ability to profitably reinvest capital.

Our Take On ShenZhen Woer Heat-Shrinkable MaterialLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what ShenZhen Woer Heat-Shrinkable MaterialLtd has. And a remarkable 308% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if ShenZhen Woer Heat-Shrinkable MaterialLtd can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing ShenZhen Woer Heat-Shrinkable MaterialLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.