There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Jinan Shengquan Group Share Holding (SHSE:605589) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 Jinan Shengquan Group Share Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = CN¥977m ÷ (CN¥15b - CN¥3.5b) (Based on the trailing twelve months to March 2024).
Therefore, Jinan Shengquan Group Share Holding has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.6%.
In the above chart we have measured Jinan Shengquan Group Share Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jinan Shengquan Group Share Holding for free.
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because Jinan Shengquan Group Share Holding's ROCE has reduced by 29% over the last five years, while the business employed 108% more capital. Usually this isn't ideal, but given Jinan Shengquan Group Share Holding conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Jinan Shengquan Group Share Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Jinan Shengquan Group Share Holding's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 7.5% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing to note, we've identified 2 warning signs with Jinan Shengquan Group Share Holding and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.