Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Qingdao Huijintong Power EquipmentLtd (SHSE:603577) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Qingdao Huijintong Power EquipmentLtd is:

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

0.066 = CN¥145m ÷ (CN¥5.6b - CN¥3.4b) (Based on the trailing twelve months to September 2023).

Therefore, Qingdao Huijintong Power EquipmentLtd has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.5% average generated by the Metals and Mining industry.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Qingdao Huijintong Power EquipmentLtd's past further, check out this free graph covering Qingdao Huijintong Power EquipmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Qingdao Huijintong Power EquipmentLtd's ROCE Trend?

There are better returns on capital out there than what we're seeing at Qingdao Huijintong Power EquipmentLtd. The company has employed 141% more capital in the last five years, and the returns on that capital have remained stable at 6.6%. 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, Qingdao Huijintong Power EquipmentLtd's current liabilities are still rather high at 60% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

As we've seen above, Qingdao Huijintong Power EquipmentLtd's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 7.0% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 5 warning signs for Qingdao Huijintong Power EquipmentLtd (2 shouldn't be ignored) you should be aware of.

While Qingdao Huijintong Power EquipmentLtd 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.