There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Vipshop Holdings' (NYSE:VIPS) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Vipshop Holdings:

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

0.24 = CN¥10b ÷ (CN¥68b - CN¥25b) (Based on the trailing twelve months to June 2024).

Therefore, Vipshop Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 13%.

Check out our latest analysis for Vipshop Holdings

Above you can see how the current ROCE for Vipshop Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Vipshop Holdings for free.

So How Is Vipshop Holdings' ROCE Trending?

Investors would be pleased with what's happening at Vipshop Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 109% more capital is being employed now too. So we're very much inspired by what we're seeing at Vipshop Holdings thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 37%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

All in all, it's terrific to see that Vipshop Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.