What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Landai Technology Group (SZSE:002765), we don't think it's current trends fit the mold of a multi-bagger.

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 Landai Technology Group, this is the formula:

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

0.0067 = CN¥25m ÷ (CN¥5.4b - CN¥1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Landai Technology Group has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.

Check out our latest analysis for Landai Technology Group

Above you can see how the current ROCE for Landai Technology Group 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 Landai Technology Group here for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Landai Technology Group's ROCE has reduced by 87% over the last five years, while the business employed 104% more capital. Usually this isn't ideal, but given Landai Technology Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Landai Technology Group 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.

Our Take On Landai Technology Group's ROCE

Bringing it all together, while we're somewhat encouraged by Landai Technology Group'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 21% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 4 warning signs for Landai Technology Group (1 can't be ignored) you should be aware of.

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.