To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Hangzhou Jingye Intelligent Technology (SHSE:688290), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hangzhou Jingye Intelligent Technology:

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

0.0017 = CN¥2.3m ÷ (CN¥1.5b - CN¥193m) (Based on the trailing twelve months to June 2024).

So, Hangzhou Jingye Intelligent Technology has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

In the above chart we have measured Hangzhou Jingye Intelligent Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou Jingye Intelligent Technology .

What Can We Tell From Hangzhou Jingye Intelligent Technology's ROCE Trend?

We weren't thrilled with the trend because Hangzhou Jingye Intelligent Technology's ROCE has reduced by 99% over the last five years, while the business employed 1,780% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hangzhou Jingye Intelligent Technology's earnings and if they change as a result from the capital raise.

On a related note, Hangzhou Jingye Intelligent Technology has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Hangzhou Jingye Intelligent Technology's ROCE

We're a bit apprehensive about Hangzhou Jingye Intelligent Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last year have experienced a 38% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Hangzhou Jingye Intelligent Technology (including 1 which is potentially serious) .

While Hangzhou Jingye Intelligent 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.