If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, iQIYI (NASDAQ:IQ) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for iQIYI:

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

0.13 = CN¥3.1b ÷ (CN¥48b - CN¥24b) (Based on the trailing twelve months to June 2024).

Therefore, iQIYI has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Entertainment industry average of 11%.

See our latest analysis for iQIYI

Above you can see how the current ROCE for iQIYI compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for iQIYI .

What Can We Tell From iQIYI's ROCE Trend?

iQIYI has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 13%, which is always encouraging. While returns have increased, the amount of capital employed by iQIYI has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that iQIYI has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To bring it all together, iQIYI has done well to increase the returns it's generating from its capital employed. Although the company may be facing some issues elsewhere since the stock has plunged 81% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing: We've identified 2 warning signs with iQIYI (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While iQIYI 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.