Did you know there are some financial metrics that can provide clues of a potential 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. However, after investigating Yunnan Energy Investment (SZSE:002053), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Yunnan Energy Investment is:

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

0.047 = CN¥720m ÷ (CN¥18b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

So, Yunnan Energy Investment has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Food industry average of 7.9%.

Above you can see how the current ROCE for Yunnan Energy Investment 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 Yunnan Energy Investment for free.

So How Is Yunnan Energy Investment's ROCE Trending?

On the surface, the trend of ROCE at Yunnan Energy Investment doesn't inspire confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 4.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Yunnan Energy Investment's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Yunnan Energy Investment. And the stock has followed suit returning a meaningful 48% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 3 warning signs with Yunnan Energy Investment (at least 2 which are significant) , and understanding them would certainly be useful.

While Yunnan Energy Investment 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.