There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Cangzhou Mingzhu PlasticLtd (SZSE:002108) and its ROCE trend, we weren't exactly thrilled.

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 Cangzhou Mingzhu PlasticLtd:

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

0.029 = CN¥176m ÷ (CN¥7.0b - CN¥951m) (Based on the trailing twelve months to September 2023).

Thus, Cangzhou Mingzhu PlasticLtd has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.0%.

Check out our latest analysis for Cangzhou Mingzhu PlasticLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cangzhou Mingzhu PlasticLtd's ROCE against it's prior returns. If you'd like to look at how Cangzhou Mingzhu PlasticLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Cangzhou Mingzhu PlasticLtd's ROCE Trending?

When we looked at the ROCE trend at Cangzhou Mingzhu PlasticLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Cangzhou Mingzhu PlasticLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Cangzhou Mingzhu PlasticLtd has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

In summary, Cangzhou Mingzhu PlasticLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Cangzhou Mingzhu PlasticLtd and understanding it should be part of your investment process.

While Cangzhou Mingzhu PlasticLtd 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.