If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Hangzhou Fortune Gas Cryogenic Group (SHSE:603173) and its ROCE trend, we weren't exactly thrilled.

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 Hangzhou Fortune Gas Cryogenic Group is:

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

0.12 = CN¥185m ÷ (CN¥4.4b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

Thus, Hangzhou Fortune Gas Cryogenic Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Fortune Gas Cryogenic Group's ROCE against it's prior returns. If you'd like to look at how Hangzhou Fortune Gas Cryogenic Group has performed in the past in other metrics, you can view this free graph of Hangzhou Fortune Gas Cryogenic Group's past earnings, revenue and cash flow.

What Can We Tell From Hangzhou Fortune Gas Cryogenic Group's ROCE Trend?

On the surface, the trend of ROCE at Hangzhou Fortune Gas Cryogenic Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Hangzhou Fortune Gas Cryogenic Group has done well to pay down its current liabilities to 65% 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 Bottom Line On Hangzhou Fortune Gas Cryogenic Group's ROCE

While returns have fallen for Hangzhou Fortune Gas Cryogenic Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 18% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Hangzhou Fortune Gas Cryogenic Group does have some risks though, and we've spotted 1 warning sign for Hangzhou Fortune Gas Cryogenic Group 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.