There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Luoniushan (SZSE:000735) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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 Luoniushan is:

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

0.019 = CN¥124m ÷ (CN¥10b - CN¥3.5b) (Based on the trailing twelve months to September 2024).

Therefore, Luoniushan has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Luoniushan's ROCE against it's prior returns. If you're interested in investigating Luoniushan's past further, check out this free graph covering Luoniushan's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Luoniushan is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Luoniushan is utilizing 33% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 34% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Luoniushan's ROCE

To the delight of most shareholders, Luoniushan has now broken into profitability. Given the stock has declined 41% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Luoniushan does come with some risks, and we've found 1 warning sign that you should be aware of.

While Luoniushan 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.