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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Gansu Engineering Consulting Group (SZSE:000779) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. Analysts use this formula to calculate it for Gansu Engineering Consulting Group:

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

0.061 = CN¥242m ÷ (CN¥5.4b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

So, Gansu Engineering Consulting Group has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gansu Engineering Consulting Group's ROCE against it's prior returns. If you'd like to look at how Gansu Engineering Consulting Group has performed in the past in other metrics, you can view this free graph of Gansu Engineering Consulting Group's past earnings, revenue and cash flow.

So How Is Gansu Engineering Consulting Group's ROCE Trending?

We weren't thrilled with the trend because Gansu Engineering Consulting Group's ROCE has reduced by 58% over the last five years, while the business employed 105% more capital. That being said, Gansu Engineering Consulting Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Gansu Engineering Consulting Group's earnings and if they change as a result from the capital raise.

Our Take On Gansu Engineering Consulting Group's ROCE

In summary, we're somewhat concerned by Gansu Engineering Consulting Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for Gansu Engineering Consulting Group (1 is a bit concerning) 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.