If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Yongxing Special Materials TechnologyLtd (SZSE:002756) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Yongxing Special Materials TechnologyLtd is:

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

0.094 = CN¥1.2b ÷ (CN¥14b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Yongxing Special Materials TechnologyLtd has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.8%.

Above you can see how the current ROCE for Yongxing Special Materials TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yongxing Special Materials TechnologyLtd for free.

So How Is Yongxing Special Materials TechnologyLtd's ROCE Trending?

The returns on capital haven't changed much for Yongxing Special Materials TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 9.4% and the business has deployed 241% more capital into its operations. 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.

What We Can Learn From Yongxing Special Materials TechnologyLtd's ROCE

As we've seen above, Yongxing Special Materials TechnologyLtd's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 217% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Yongxing Special Materials TechnologyLtd, we've spotted 2 warning signs, and 1 of them is concerning.

While Yongxing Special Materials TechnologyLtd 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.