There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Guizhou TyreLtd (SZSE:000589) so let's look a bit deeper.

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

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. Analysts use this formula to calculate it for Guizhou TyreLtd:

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

0.087 = CN¥832m ÷ (CN¥18b - CN¥8.0b) (Based on the trailing twelve months to September 2023).

Therefore, Guizhou TyreLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 5.8% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Guizhou TyreLtd

Above you can see how the current ROCE for Guizhou TyreLtd 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 report for Guizhou TyreLtd.

What Can We Tell From Guizhou TyreLtd's ROCE Trend?

We're delighted to see that Guizhou TyreLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 8.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Guizhou TyreLtd is utilizing 123% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Guizhou TyreLtd has decreased current liabilities to 45% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Guizhou TyreLtd's ROCE

Overall, Guizhou TyreLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 104% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Guizhou TyreLtd you'll probably want to know about.

While Guizhou TyreLtd 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.