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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Dalian Insulator Group (SZSE:002606) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Dalian Insulator Group is:

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

0.088 = CN¥137m ÷ (CN¥1.8b - CN¥299m) (Based on the trailing twelve months to June 2022).

Thus, Dalian Insulator Group has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.3%.

View our latest analysis for Dalian Insulator Group

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

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Dalian Insulator Group. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 8.8%. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 16% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Dalian Insulator Group's ROCE

In conclusion, Dalian Insulator Group has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 104% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Dalian Insulator Group does have some risks though, and we've spotted 1 warning sign for Dalian Insulator Group that you might be interested in.

While Dalian Insulator Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.