If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at IKD (SHSE:600933) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for IKD:

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

0.099 = CN¥1.1b ÷ (CN¥14b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

So, IKD has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 7.0%.

Above you can see how the current ROCE for IKD compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for IKD .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at IKD. The company has consistently earned 9.9% for the last five years, and the capital employed within the business has risen 143% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On IKD's ROCE

In conclusion, IKD has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 2 warning signs for IKD that we think 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.