If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Jiangsu Guoxin (SZSE:002608), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Jiangsu Guoxin is:

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

0.05 = CN¥3.5b ÷ (CN¥91b - CN¥20b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Guoxin has an ROCE of 5.0%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

In the above chart we have measured Jiangsu Guoxin's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Guoxin .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiangsu Guoxin, we didn't gain much confidence. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 5.0%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Jiangsu Guoxin's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Guoxin is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 11% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Jiangsu Guoxin does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Jiangsu Guoxin 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.