To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Weima Agricultural MachineryLtd (SZSE:301533) 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 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. The formula for this calculation on Weima Agricultural MachineryLtd is:

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

0.06 = CN¥67m ÷ (CN¥1.3b - CN¥221m) (Based on the trailing twelve months to September 2024).

Therefore, Weima Agricultural MachineryLtd has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

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

So How Is Weima Agricultural MachineryLtd's ROCE Trending?

On the surface, the trend of ROCE at Weima Agricultural MachineryLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Weima Agricultural MachineryLtd has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

While returns have fallen for Weima Agricultural MachineryLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 15% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Weima Agricultural MachineryLtd (of which 1 is a bit concerning!) that you should know about.

While Weima Agricultural MachineryLtd 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.