If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Wuxi Taiji Industry Limited (SHSE:600667) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Wuxi Taiji Industry Limited is:

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

0.093 = CN¥972m ÷ (CN¥33b - CN¥22b) (Based on the trailing twelve months to September 2024).

So, Wuxi Taiji Industry Limited has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.9%.

Above you can see how the current ROCE for Wuxi Taiji Industry Limited compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wuxi Taiji Industry Limited .

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Wuxi Taiji Industry Limited's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Wuxi Taiji Industry Limited to be a multi-bagger going forward.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 68% of total assets, this reported ROCE would probably be less than9.3% because total capital employed would be higher.The 9.3% ROCE could be even lower if current liabilities weren't 68% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line On Wuxi Taiji Industry Limited's ROCE

In summary, Wuxi Taiji Industry Limited isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Wuxi Taiji Industry Limited has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Wuxi Taiji Industry Limited that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.