If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Milkyway Chemical Supply Chain Service (SHSE:603713) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Milkyway Chemical Supply Chain Service:

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

0.16 = CN¥730m ÷ (CN¥8.2b - CN¥3.8b) (Based on the trailing twelve months to June 2022).

Therefore, Milkyway Chemical Supply Chain Service has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Logistics industry.

View our latest analysis for Milkyway Chemical Supply Chain Service

In the above chart we have measured Milkyway Chemical Supply Chain Service'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 Milkyway Chemical Supply Chain Service here for free.

What Does the ROCE Trend For Milkyway Chemical Supply Chain Service Tell Us?

The trends we've noticed at Milkyway Chemical Supply Chain Service are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 510%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

To sum it up, Milkyway Chemical Supply Chain Service has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 293% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Milkyway Chemical Supply Chain Service you'll probably want to know about.

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.