There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Bozhon Precision Industry TechnologyLtd (SHSE:688097), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Bozhon Precision Industry TechnologyLtd, this is the formula:

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

0.093 = CN¥415m ÷ (CN¥7.8b - CN¥3.4b) (Based on the trailing twelve months to December 2023).

Thus, Bozhon Precision Industry TechnologyLtd has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.0% generated by the Machinery industry, it's much better.

Above you can see how the current ROCE for Bozhon Precision Industry TechnologyLtd 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 Bozhon Precision Industry TechnologyLtd .

So How Is Bozhon Precision Industry TechnologyLtd's ROCE Trending?

We weren't thrilled with the trend because Bozhon Precision Industry TechnologyLtd's ROCE has reduced by 68% over the last five years, while the business employed 290% more capital. That being said, Bozhon Precision Industry TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Bozhon Precision Industry TechnologyLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Bozhon Precision Industry TechnologyLtd has decreased its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

To conclude, we've found that Bozhon Precision Industry TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Bozhon Precision Industry TechnologyLtd it's worth checking out our FREE intrinsic value approximation for 688097 to see if it's trading at an attractive price in other respects.

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.