To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Kunshan GuoLi Electronic Technology (SHSE:688103) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Kunshan GuoLi Electronic Technology, this is the formula:

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

0.051 = CN¥79m ÷ (CN¥2.0b - CN¥399m) (Based on the trailing twelve months to September 2023).

So, Kunshan GuoLi Electronic Technology has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.4%.

Above you can see how the current ROCE for Kunshan GuoLi Electronic Technology 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 Kunshan GuoLi Electronic Technology here for free.

What Does the ROCE Trend For Kunshan GuoLi Electronic Technology Tell Us?

The fact that Kunshan GuoLi Electronic Technology is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 5.1% on its capital. In addition to that, Kunshan GuoLi Electronic Technology is employing 265% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

In summary, it's great to see that Kunshan GuoLi Electronic Technology has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 51% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Kunshan GuoLi Electronic Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Kunshan GuoLi Electronic Technology 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.