There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Jiangsu Sanfame Polyester MaterialLtd (SHSE:600370) so let's look a bit deeper.

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 Jiangsu Sanfame Polyester MaterialLtd is:

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

0.13 = CN¥1.0b ÷ (CN¥12b - CN¥4.8b) (Based on the trailing twelve months to March 2022).

Therefore, Jiangsu Sanfame Polyester MaterialLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.3% it's much better.

Check out our latest analysis for Jiangsu Sanfame Polyester MaterialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Sanfame Polyester MaterialLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jiangsu Sanfame Polyester MaterialLtd, check out these free graphs here.

What Does the ROCE Trend For Jiangsu Sanfame Polyester MaterialLtd Tell Us?

The trends we've noticed at Jiangsu Sanfame Polyester MaterialLtd are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 405%. So we're very much inspired by what we're seeing at Jiangsu Sanfame Polyester MaterialLtd thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Jiangsu Sanfame Polyester MaterialLtd's ROCE

To sum it up, Jiangsu Sanfame Polyester MaterialLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 2 warning signs we've spotted with Jiangsu Sanfame Polyester MaterialLtd (including 1 which is potentially serious) .

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.