To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 China Resources Building Materials Technology Holdings (HKG:1313) 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. Analysts use this formula to calculate it for China Resources Building Materials Technology Holdings:

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

0.015 = CN¥934m ÷ (CN¥73b - CN¥11b) (Based on the trailing twelve months to December 2023).

Thus, China Resources Building Materials Technology Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 3.5%.

In the above chart we have measured China Resources Building Materials Technology Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for China Resources Building Materials Technology Holdings .

What Does the ROCE Trend For China Resources Building Materials Technology Holdings Tell Us?

On the surface, the trend of ROCE at China Resources Building Materials Technology Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.5% from 24% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On China Resources Building Materials Technology Holdings' ROCE

We're a bit apprehensive about China Resources Building Materials Technology Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 80% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for China Resources Building Materials Technology Holdings that we think you should be aware of.

While China Resources Building Materials Technology Holdings 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.