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. 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. However, after investigating Foshan Electrical and LightingLtd (SZSE:000541), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Foshan Electrical and LightingLtd, this is the formula:

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

0.02 = CN¥207m ÷ (CN¥17b - CN¥6.8b) (Based on the trailing twelve months to September 2024).

Therefore, Foshan Electrical and LightingLtd has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

Above you can see how the current ROCE for Foshan Electrical and LightingLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Foshan Electrical and LightingLtd .

What Does the ROCE Trend For Foshan Electrical and LightingLtd Tell Us?

We weren't thrilled with the trend because Foshan Electrical and LightingLtd's ROCE has reduced by 57% over the last five years, while the business employed 137% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Foshan Electrical and LightingLtd's earnings and if they change as a result from the capital raise.

On a side note, Foshan Electrical and LightingLtd's current liabilities have increased over the last five years to 39% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Foshan Electrical and LightingLtd's ROCE

To conclude, we've found that Foshan Electrical and LightingLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 34% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Foshan Electrical and LightingLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Foshan Electrical and LightingLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.