If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shanxi Huaxiang Group (SHSE:603112) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shanxi Huaxiang Group is:

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

0.097 = CN¥479m ÷ (CN¥5.9b - CN¥912m) (Based on the trailing twelve months to September 2024).

So, Shanxi Huaxiang Group has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.2%.

In the above chart we have measured Shanxi Huaxiang Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanxi Huaxiang Group .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Shanxi Huaxiang Group. Over the past five years, ROCE has remained relatively flat at around 9.7% and the business has deployed 270% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shanxi Huaxiang Group has done well to reduce current liabilities to 16% 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.

The Bottom Line

Long story short, while Shanxi Huaxiang Group has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 8.4% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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

While Shanxi Huaxiang Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.