If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating China Railway Construction (SHSE:601186), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China Railway Construction is:

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

0.071 = CN¥40b ÷ (CN¥1.4t - CN¥889b) (Based on the trailing twelve months to March 2022).

Thus, China Railway Construction has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.5%.

View our latest analysis for China Railway Construction

Above you can see how the current ROCE for China Railway Construction compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Railway Construction here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for China Railway Construction in recent years. Over the past five years, ROCE has remained relatively flat at around 7.1% and the business has deployed 98% more capital into its operations. 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.

Another thing to note, China Railway Construction has a high ratio of current liabilities to total assets of 62%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On China Railway Construction's ROCE

Long story short, while China Railway Construction has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 32% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think China Railway Construction has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with China Railway Construction (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.