Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 investigating Wanxiang QianchaoLtd (SZSE:000559), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wanxiang QianchaoLtd, this is the formula:

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

0.067 = CN¥645m ÷ (CN¥20b - CN¥9.9b) (Based on the trailing twelve months to September 2023).

Therefore, Wanxiang QianchaoLtd has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

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

What Does the ROCE Trend For Wanxiang QianchaoLtd Tell Us?

When we looked at the ROCE trend at Wanxiang QianchaoLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Wanxiang QianchaoLtd 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 side note, Wanxiang QianchaoLtd's current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Wanxiang QianchaoLtd's ROCE

To conclude, we've found that Wanxiang QianchaoLtd is reinvesting in the business, but returns have been falling. 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.

Wanxiang QianchaoLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.