If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Windey Energy Technology Group (SZSE:300772), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Windey Energy Technology Group, this is the formula:

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

0.034 = CN¥318m ÷ (CN¥33b - CN¥23b) (Based on the trailing twelve months to March 2024).

Therefore, Windey Energy Technology Group has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

In the above chart we have measured Windey Energy Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Windey Energy Technology Group for free.

What Can We Tell From Windey Energy Technology Group's ROCE Trend?

We weren't thrilled with the trend because Windey Energy Technology Group's ROCE has reduced by 62% over the last five years, while the business employed 438% more capital. Usually this isn't ideal, but given Windey Energy 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Windey Energy Technology Group's earnings and if they change as a result from the capital raise.

On a separate but related note, it's important to know that Windey Energy Technology Group has a current liabilities to total assets ratio of 71%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Windey Energy Technology Group's ROCE

In summary, Windey Energy Technology Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Windey Energy Technology Group that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.