Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating MLS (SZSE:002745), 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. Analysts use this formula to calculate it for MLS:

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

0.055 = CN¥778m ÷ (CN¥24b - CN¥9.9b) (Based on the trailing twelve months to September 2024).

So, MLS has an ROCE of 5.5%. On its own, that's a low figure but it's around the 4.8% average generated by the Semiconductor industry.

In the above chart we have measured MLS' 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 MLS for free.

What Does the ROCE Trend For MLS Tell Us?

Over the past five years, MLS' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if MLS doesn't end up being a multi-bagger in a few years time.

On a side note, MLS has done well to reduce current liabilities to 41% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 41%, some of that risk is still prevalent.

The Key Takeaway

We can conclude that in regards to MLS' returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 23% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing MLS, we've discovered 1 warning sign that you should be aware of.

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.