To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Wangneng EnvironmentLtd (SZSE:002034) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Wangneng EnvironmentLtd is:

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

0.08 = CN¥998m ÷ (CN¥15b - CN¥2.2b) (Based on the trailing twelve months to September 2023).

So, Wangneng EnvironmentLtd has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Commercial Services industry, it's much better.

In the above chart we have measured Wangneng EnvironmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wangneng EnvironmentLtd .

How Are Returns Trending?

The returns on capital haven't changed much for Wangneng EnvironmentLtd in recent years. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 141% 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.

Our Take On Wangneng EnvironmentLtd's ROCE

Long story short, while Wangneng EnvironmentLtd has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. Therefore based on the analysis done in this article, we don't think Wangneng EnvironmentLtd has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Wangneng EnvironmentLtd that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.