To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Guangdong Rifeng Electric Cable (SZSE:002953), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Guangdong Rifeng Electric Cable is:

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

0.066 = CN¥126m ÷ (CN¥3.0b - CN¥1.1b) (Based on the trailing twelve months to June 2023).

Therefore, Guangdong Rifeng Electric Cable has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.3%.

See our latest analysis for Guangdong Rifeng Electric Cable

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Rifeng Electric Cable's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Guangdong Rifeng Electric Cable, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Guangdong Rifeng Electric Cable doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 6.6%. However it looks like Guangdong Rifeng Electric Cable might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Guangdong Rifeng Electric Cable's ROCE

To conclude, we've found that Guangdong Rifeng Electric Cable is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 8.3% to shareholders over the last three years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Guangdong Rifeng Electric Cable (including 1 which can't be ignored) .

While Guangdong Rifeng Electric Cable 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.