To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Jilin Chemical Fibre StockLtd (SZSE:000420) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Jilin Chemical Fibre StockLtd is:

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

0.046 = CN¥264m ÷ (CN¥11b - CN¥5.1b) (Based on the trailing twelve months to September 2023).

Thus, Jilin Chemical Fibre StockLtd has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.8%.

Above you can see how the current ROCE for Jilin Chemical Fibre StockLtd 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 analyst report for Jilin Chemical Fibre StockLtd .

What Can We Tell From Jilin Chemical Fibre StockLtd's ROCE Trend?

When we looked at the ROCE trend at Jilin Chemical Fibre StockLtd, we didn't gain much confidence. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 4.6%. 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 side note, Jilin Chemical Fibre StockLtd's current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Jilin Chemical Fibre StockLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jilin Chemical Fibre StockLtd have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 31% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Jilin Chemical Fibre StockLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Jilin Chemical Fibre StockLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.