If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at North Industries Group Red Arrow (SZSE:000519), it didn't seem to tick all of these boxes.

Understanding 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 North Industries Group Red Arrow is:

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

0.05 = CN¥564m ÷ (CN¥16b - CN¥4.3b) (Based on the trailing twelve months to September 2024).

Therefore, North Industries Group Red Arrow has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

Above you can see how the current ROCE for North Industries Group Red Arrow 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 North Industries Group Red Arrow .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at North Industries Group Red Arrow. The company has employed 31% more capital in the last five years, and the returns on that capital have remained stable at 5.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

Long story short, while North Industries Group Red Arrow has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching North Industries Group Red Arrow, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.