To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Willfar Information Technology (SHSE:688100) looks quite promising in regards to its trends of return on capital.

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 Willfar Information Technology is:

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

0.19 = CN¥526m ÷ (CN¥4.2b - CN¥1.4b) (Based on the trailing twelve months to September 2023).

So, Willfar Information Technology has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.

View our latest analysis for Willfar Information Technology

Above you can see how the current ROCE for Willfar Information Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Willfar Information Technology here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Willfar Information Technology. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 117%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

To sum it up, Willfar Information Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 33% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Willfar Information Technology does have some risks though, and we've spotted 1 warning sign for Willfar Information Technology that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.