Liaoning Cheng Da (SHSE:600739) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Liaoning Cheng Da (SHSE:600739) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Liaoning Cheng Da, this is the formula:

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

0.013 = CN¥480m ÷ (CN¥47b - CN¥11b) (Based on the trailing twelve months to September 2023).

Thus, Liaoning Cheng Da has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 5.8%.

Check out our latest analysis for Liaoning Cheng Da

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liaoning Cheng Da's ROCE against it's prior returns. If you're interested in investigating Liaoning Cheng Da's past further, check out this free graph covering Liaoning Cheng Da's past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Liaoning Cheng Da in recent years. Over the past five years, ROCE has remained relatively flat at around 1.3% and the business has deployed 34% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, Liaoning Cheng Da has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. Therefore based on the analysis done in this article, we don't think Liaoning Cheng Da has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Liaoning Cheng Da you'll probably want to know about.

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.