What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 investigating Hubei Chutian Smart CommunicationLtd (SHSE:600035), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Hubei Chutian Smart CommunicationLtd:

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

0.087 = CN¥1.3b ÷ (CN¥19b - CN¥3.9b) (Based on the trailing twelve months to September 2023).

Thus, Hubei Chutian Smart CommunicationLtd has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Infrastructure industry average of 5.1%.

View our latest analysis for Hubei Chutian Smart CommunicationLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hubei Chutian Smart CommunicationLtd, check out these free graphs here.

What Does the ROCE Trend For Hubei Chutian Smart CommunicationLtd Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 74%. That being said, Hubei Chutian Smart CommunicationLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Hubei Chutian Smart CommunicationLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line

To conclude, we've found that Hubei Chutian Smart CommunicationLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Hubei Chutian Smart CommunicationLtd does have some risks though, and we've spotted 2 warning signs for Hubei Chutian Smart CommunicationLtd that you might be interested in.

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.