There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Shandong Weifang Rainbow Chemical (SZSE:301035) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. To calculate this metric for Shandong Weifang Rainbow Chemical, this is the formula:

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

0.15 = CN¥1.1b ÷ (CN¥16b - CN¥8.7b) (Based on the trailing twelve months to September 2024).

So, Shandong Weifang Rainbow Chemical has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Chemicals industry.

In the above chart we have measured Shandong Weifang Rainbow Chemical'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 Shandong Weifang Rainbow Chemical .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 192% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Shandong Weifang Rainbow Chemical has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Shandong Weifang Rainbow Chemical's current liabilities are still rather high at 55% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, Shandong Weifang Rainbow Chemical has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 16% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

One final note, you should learn about the 3 warning signs we've spotted with Shandong Weifang Rainbow Chemical (including 1 which shouldn't be ignored) .

While Shandong Weifang Rainbow Chemical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.