Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Rayitek Hi-Tech Film Company Shenzhen (SHSE:688323) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Rayitek Hi-Tech Film Company Shenzhen, this is the formula:

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

0.02 = CN¥41m ÷ (CN¥2.3b - CN¥210m) (Based on the trailing twelve months to December 2022).

Therefore, Rayitek Hi-Tech Film Company Shenzhen has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.9%.

See our latest analysis for Rayitek Hi-Tech Film Company Shenzhen

Above you can see how the current ROCE for Rayitek Hi-Tech Film Company Shenzhen 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 report on analyst forecasts for the company.

So How Is Rayitek Hi-Tech Film Company Shenzhen's ROCE Trending?

In terms of Rayitek Hi-Tech Film Company Shenzhen's historical ROCE trend, it doesn't exactly demand attention. The company has employed 326% more capital in the last five years, and the returns on that capital have remained stable at 2.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Rayitek Hi-Tech Film Company Shenzhen has done well to reduce current liabilities to 9.1% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

As we've seen above, Rayitek Hi-Tech Film Company Shenzhen's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Rayitek Hi-Tech Film Company Shenzhen, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Rayitek Hi-Tech Film Company Shenzhen 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.