If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Himile Mechanical Science and Technology (Shandong)'s (SZSE:002595) trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Himile Mechanical Science and Technology (Shandong), this is the formula:

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

0.21 = CN¥2.0b ÷ (CN¥11b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Himile Mechanical Science and Technology (Shandong) has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 5.4% earned by companies in a similar industry.

In the above chart we have measured Himile Mechanical Science and Technology (Shandong)'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 Himile Mechanical Science and Technology (Shandong) for free.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Himile Mechanical Science and Technology (Shandong). Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 106% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Himile Mechanical Science and Technology (Shandong) has done well to reduce current liabilities to 12% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Himile Mechanical Science and Technology (Shandong)'s ROCE

Himile Mechanical Science and Technology (Shandong) has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 172% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Himile Mechanical Science and Technology (Shandong) and understanding this should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.