If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shuhua Sports (SHSE:605299) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shuhua Sports:

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

0.096 = CN¥127m ÷ (CN¥2.0b - CN¥674m) (Based on the trailing twelve months to September 2024).

Thus, Shuhua Sports has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Leisure industry average of 5.3%.

Above you can see how the current ROCE for Shuhua Sports 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 Shuhua Sports .

What Does the ROCE Trend For Shuhua Sports Tell Us?

On the surface, the trend of ROCE at Shuhua Sports doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.6% from 18% five years ago. However it looks like Shuhua Sports might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Shuhua Sports' ROCE

Bringing it all together, while we're somewhat encouraged by Shuhua Sports' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 46% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Shuhua Sports 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.