If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Hangzhou Todaytec Digital (SZSE:300743) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Hangzhou Todaytec Digital, this is the formula:

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

0.083 = CN¥55m ÷ (CN¥910m - CN¥242m) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou Todaytec Digital has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.7%.

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

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Hangzhou Todaytec Digital in recent years. The company has employed 74% more capital in the last five years, and the returns on that capital have remained stable at 8.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Hangzhou Todaytec Digital has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Hangzhou Todaytec Digital has the makings of a multi-bagger.

If you want to continue researching Hangzhou Todaytec Digital, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Hangzhou Todaytec Digital 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.