Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Wencan Group (SHSE:603348), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Wencan Group is:

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

0.025 = CN¥118m ÷ (CN¥7.5b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

So, Wencan Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.6%.

Above you can see how the current ROCE for Wencan Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Wencan Group for free.

So How Is Wencan Group's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 9.5% five years ago, while capital employed has grown 98%. That being said, Wencan Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Wencan Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Wencan Group's ROCE

Bringing it all together, while we're somewhat encouraged by Wencan Group's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 8.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Wencan Group (including 1 which is a bit concerning) .

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.