Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Changgao Electric Group (SZSE:002452) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Changgao Electric Group, this is the formula:

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

0.086 = CN¥203m ÷ (CN¥3.2b - CN¥830m) (Based on the trailing twelve months to March 2022).

Thus, Changgao Electric Group has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.4%.

Check out our latest analysis for Changgao Electric Group

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

So How Is Changgao Electric Group's ROCE Trending?

The returns on capital haven't changed much for Changgao Electric Group in recent years. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 31% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, Changgao Electric Group has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 10% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 3 warning signs for Changgao Electric Group you'll probably want to know about.

While Changgao Electric Group 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.