Chengdu Leejun Industrial (SZSE:002651) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Chengdu Leejun Industrial (SZSE:002651) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Chengdu Leejun Industrial is:

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

0.063 = CN¥177m ÷ (CN¥3.3b - CN¥555m) (Based on the trailing twelve months to March 2024).

So, Chengdu Leejun Industrial has an ROCE of 6.3%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for Chengdu Leejun Industrial

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

What Does the ROCE Trend For Chengdu Leejun Industrial Tell Us?

There are better returns on capital out there than what we're seeing at Chengdu Leejun Industrial. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 32% 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 Chengdu Leejun Industrial's ROCE

In summary, Chengdu Leejun Industrial has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 3 warning signs facing Chengdu Leejun Industrial that you might find interesting.

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.

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