If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Henan Communications Planning & Design Institute (SZSE:300732) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Henan Communications Planning & Design Institute:

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

0.028 = CN¥122m ÷ (CN¥6.9b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

Thus, Henan Communications Planning & Design Institute has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Communications Planning & Design Institute's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Henan Communications Planning & Design Institute.

What Can We Tell From Henan Communications Planning & Design Institute's ROCE Trend?

On the surface, the trend of ROCE at Henan Communications Planning & Design Institute doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.8%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Henan Communications Planning & Design Institute's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 16% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Henan Communications Planning & Design Institute (of which 3 can't be ignored!) that you should know about.

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.