Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sanxiang Advanced Materials (SHSE:603663) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sanxiang Advanced Materials:

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

0.10 = CN¥133m ÷ (CN¥1.6b - CN¥266m) (Based on the trailing twelve months to March 2022).

So, Sanxiang Advanced Materials has an ROCE of 10.0%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

Check out our latest analysis for Sanxiang Advanced Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanxiang Advanced Materials' ROCE against it's prior returns. If you'd like to look at how Sanxiang Advanced Materials has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sanxiang Advanced Materials' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 10.0% and the business has deployed 200% more capital into its operations. 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.

What We Can Learn From Sanxiang Advanced Materials' ROCE

In summary, Sanxiang Advanced Materials has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Sanxiang Advanced Materials, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Sanxiang Advanced Materials 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.