If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Guangdong Real-Design Intelligent Technology (SZSE:301135) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Guangdong Real-Design Intelligent Technology, this is the formula:

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

0.0019 = CN¥2.5m ÷ (CN¥1.8b - CN¥469m) (Based on the trailing twelve months to September 2023).

So, Guangdong Real-Design Intelligent Technology has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

View our latest analysis for Guangdong Real-Design Intelligent Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Real-Design Intelligent Technology's ROCE against it's prior returns. If you're interested in investigating Guangdong Real-Design Intelligent Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Guangdong Real-Design Intelligent Technology's ROCE Trend?

When we looked at the ROCE trend at Guangdong Real-Design Intelligent Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. However it looks like Guangdong Real-Design Intelligent Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Guangdong Real-Design Intelligent Technology has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Guangdong Real-Design Intelligent Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Real-Design Intelligent Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Guangdong Real-Design Intelligent Technology, we've spotted 3 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.