Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Shanghai Kaichuang Marine International (SHSE:600097), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Shanghai Kaichuang Marine International is:

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

0.06 = CN¥171m ÷ (CN¥3.4b - CN¥543m) (Based on the trailing twelve months to December 2023).

So, Shanghai Kaichuang Marine International has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Food industry average of 7.5%.

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

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai Kaichuang Marine International doesn't inspire confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 6.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shanghai Kaichuang Marine International's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 3 warning signs with Shanghai Kaichuang Marine International (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.