If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Crystal Growth & Energy EquipmentLtd (SHSE:688478), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Crystal Growth & Energy EquipmentLtd, this is the formula:

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

0.051 = CN¥79m ÷ (CN¥1.8b - CN¥261m) (Based on the trailing twelve months to December 2023).

Therefore, Crystal Growth & Energy EquipmentLtd has an ROCE of 5.1%. Even though it's in line with the industry average of 4.5%, it's still a low return by itself.

In the above chart we have measured Crystal Growth & Energy EquipmentLtd'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 Crystal Growth & Energy EquipmentLtd .

What Can We Tell From Crystal Growth & Energy EquipmentLtd's ROCE Trend?

The returns on capital haven't changed much for Crystal Growth & Energy EquipmentLtd in recent years. Over the past one year, ROCE has remained relatively flat at around 5.1% and the business has deployed 203% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Crystal Growth & Energy EquipmentLtd's ROCE

In conclusion, Crystal Growth & Energy EquipmentLtd has been investing more capital into the business, but returns on that capital haven't increased. And in the last year, the stock has given away 44% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Crystal Growth & Energy EquipmentLtd has the makings of a multi-bagger.

Crystal Growth & Energy EquipmentLtd does have some risks though, and we've spotted 2 warning signs for Crystal Growth & Energy EquipmentLtd that you might be interested in.

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.