Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Flying Technology (SHSE:603488), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Flying Technology is:

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

0.061 = CN¥64m ÷ (CN¥1.2b - CN¥175m) (Based on the trailing twelve months to December 2023).

Thus, Flying Technology has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Flying Technology's ROCE against it's prior returns. If you'd like to look at how Flying Technology has performed in the past in other metrics, you can view this free graph of Flying Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Flying Technology. The company has consistently earned 6.1% for the last five years, and the capital employed within the business has risen 25% in that time. 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.

What We Can Learn From Flying Technology's ROCE

In summary, Flying Technology has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Flying Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn'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.