To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Talkweb Information SystemLtd (SZSE:002261) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Talkweb Information SystemLtd, this is the formula:

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

0.0045 = CN¥14m ÷ (CN¥5.3b - CN¥2.1b) (Based on the trailing twelve months to March 2024).

So, Talkweb Information SystemLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.2%.

Above you can see how the current ROCE for Talkweb Information SystemLtd 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 Talkweb Information SystemLtd for free.

So How Is Talkweb Information SystemLtd's ROCE Trending?

Shareholders will be relieved that Talkweb Information SystemLtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.4% on its capital. While returns have increased, the amount of capital employed by Talkweb Information SystemLtd has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

In summary, we're delighted to see that Talkweb Information SystemLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 86% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Talkweb Information SystemLtd can keep these trends up, it could have a bright future ahead.

If you want to continue researching Talkweb Information SystemLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Talkweb Information SystemLtd 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.