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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Weihai Guangwei Composites' (SZSE:300699) ROCE trend, we were pretty happy with what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Weihai Guangwei Composites:

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

0.14 = CN¥929m ÷ (CN¥7.8b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Weihai Guangwei Composites has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

In the above chart we have measured Weihai Guangwei Composites' 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 Weihai Guangwei Composites .

What Does the ROCE Trend For Weihai Guangwei Composites Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 91% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Weihai Guangwei Composites has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Weihai Guangwei Composites has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 30% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a final note, we found 2 warning signs for Weihai Guangwei Composites (1 doesn't sit too well with us) you should be aware of.

While Weihai Guangwei Composites 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.