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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at De Rucci Healthy Sleep (SZSE:001323), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for De Rucci Healthy Sleep:

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

0.17 = CN¥760m ÷ (CN¥7.1b - CN¥2.5b) (Based on the trailing twelve months to September 2023).

Therefore, De Rucci Healthy Sleep has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Consumer Durables industry.

Check out our latest analysis for De Rucci Healthy Sleep

Above you can see how the current ROCE for De Rucci Healthy Sleep compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for De Rucci Healthy Sleep.

So How Is De Rucci Healthy Sleep's ROCE Trending?

When we looked at the ROCE trend at De Rucci Healthy Sleep, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 17% from 39% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, De Rucci Healthy Sleep has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On De Rucci Healthy Sleep's ROCE

We're a bit apprehensive about De Rucci Healthy Sleep because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

De Rucci Healthy Sleep could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While De Rucci Healthy Sleep 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.