What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Guangdong Haomei New MaterialsLtd (SZSE:002988), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Guangdong Haomei New MaterialsLtd:

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

0.093 = CN¥347m ÷ (CN¥6.2b - CN¥2.5b) (Based on the trailing twelve months to September 2024).

So, Guangdong Haomei New MaterialsLtd has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.7%.

Above you can see how the current ROCE for Guangdong Haomei New MaterialsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Haomei New MaterialsLtd .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Guangdong Haomei New MaterialsLtd. The company has consistently earned 9.3% for the last five years, and the capital employed within the business has risen 130% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Guangdong Haomei New MaterialsLtd's ROCE

In summary, Guangdong Haomei New MaterialsLtd has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 32% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 3 warning signs for Guangdong Haomei New MaterialsLtd (1 shouldn't be ignored) you should be aware of.

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.