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. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don’t think Chengdu Xingrong Environment (SZSE:000598) 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. To calculate this metric for Chengdu Xingrong Environment, this is the formula:

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

0.069 = CN¥2.7b ÷ (CN¥47b – CN¥8.7b) (Based on the trailing twelve months to September 2024).

Thus, Chengdu Xingrong Environment has an ROCE of 6.9%. In absolute terms, that’s a low return but it’s around the Water Utilities industry average of 6.2%.

View our latest analysis for Chengdu Xingrong Environment

In the above chart we have measured Chengdu Xingrong Environment’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Chengdu Xingrong Environment .

What Can We Tell From Chengdu Xingrong Environment’s ROCE Trend?

The returns on capital haven’t changed much for Chengdu Xingrong Environment in recent years. The company has consistently earned 6.9% for the last five years, and the capital employed within the business has risen 120% in that time. 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.

The Bottom Line

In summary, Chengdu Xingrong Environment has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 81% over the last five years. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.

On a final note, we found 2 warning signs for Chengdu Xingrong Environment (1 is significant) 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.