If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Hangzhou Advance Gearbox Group's (SHSE:601177) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Hangzhou Advance Gearbox Group is:

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

0.01 = CN¥33m ÷ (CN¥4.9b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

So, Hangzhou Advance Gearbox Group has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that Hangzhou Advance Gearbox Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.0% which is a sight for sore eyes. In addition to that, Hangzhou Advance Gearbox Group is employing 58% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Hangzhou Advance Gearbox Group's ROCE

To the delight of most shareholders, Hangzhou Advance Gearbox Group has now broken into profitability. And since the stock has fallen 18% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Hangzhou Advance Gearbox Group you'll probably want to know about.

While Hangzhou Advance Gearbox Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.