To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Qian Jiang Water Resources DevelopmentLtd's (SHSE:600283) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Qian Jiang Water Resources DevelopmentLtd:

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

0.063 = CN¥361m ÷ (CN¥9.3b - CN¥3.5b) (Based on the trailing twelve months to September 2024).

So, Qian Jiang Water Resources DevelopmentLtd has an ROCE of 6.3%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qian Jiang Water Resources DevelopmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Qian Jiang Water Resources DevelopmentLtd.

What Can We Tell From Qian Jiang Water Resources DevelopmentLtd's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.3%. The amount of capital employed has increased too, by 58%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Qian Jiang Water Resources DevelopmentLtd's ROCE

To sum it up, Qian Jiang Water Resources DevelopmentLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 52% return over the last five years. In light of that, we think it's worth looking further into this stock because if Qian Jiang Water Resources DevelopmentLtd can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Qian Jiang Water Resources DevelopmentLtd (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.