If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Guangdong Silver Age Sci & TechLtd's (SZSE:300221) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Guangdong Silver Age Sci & TechLtd:

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

0.05 = CN¥75m ÷ (CN¥2.2b - CN¥711m) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Silver Age Sci & TechLtd has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Chemicals 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 Guangdong Silver Age Sci & TechLtd's ROCE against it's prior returns. If you're interested in investigating Guangdong Silver Age Sci & TechLtd's past further, check out this free graph covering Guangdong Silver Age Sci & TechLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Guangdong Silver Age Sci & TechLtd has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 5.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Guangdong Silver Age Sci & TechLtd is utilizing 26% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Long story short, we're delighted to see that Guangdong Silver Age Sci & TechLtd's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 15% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Guangdong Silver Age Sci & TechLtd does have some risks though, and we've spotted 1 warning sign for Guangdong Silver Age Sci & TechLtd that you might be interested in.

While Guangdong Silver Age Sci & TechLtd 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.