There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Canggang Railway (HKG:2169) 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 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. To calculate this metric for Canggang Railway, this is the formula:

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

0.11 = CN¥123m ÷ (CN¥1.3b - CN¥232m) (Based on the trailing twelve months to June 2023).

So, Canggang Railway has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Transportation industry.

View our latest analysis for Canggang Railway

Historical performance is a great place to start when researching a stock so above you can see the gauge for Canggang Railway's ROCE against it's prior returns. If you're interested in investigating Canggang Railway's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Canggang Railway's ROCE Trend?

Things have been pretty stable at Canggang Railway, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Canggang Railway to be a multi-bagger going forward.

In Conclusion...

In summary, Canggang Railway isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 816% return in the last three years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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

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.