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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think MicroAlgo (NASDAQ:MLGO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 MicroAlgo, this is the formula:

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

0.019 = CN¥20m ÷ (CN¥1.3b - CN¥207m) (Based on the trailing twelve months to December 2024).

Thus, MicroAlgo has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.4%.

Check out our latest analysis for MicroAlgo

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

What Does the ROCE Trend For MicroAlgo Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 379%. That being said, MicroAlgo raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence MicroAlgo might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 16%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by MicroAlgo's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 100% over the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

MicroAlgo does have some risks, we noticed 4 warning signs (and 3 which can't be ignored) we think you should know about.

While MicroAlgo may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.