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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Ningbo Huaxiang Electronic (SZSE:002048) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Ningbo Huaxiang Electronic:

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

0.094 = CN¥1.5b ÷ (CN¥27b - CN¥11b) (Based on the trailing twelve months to March 2024).

Thus, Ningbo Huaxiang Electronic has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

Above you can see how the current ROCE for Ningbo Huaxiang Electronic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ningbo Huaxiang Electronic .

How Are Returns Trending?

The returns on capital haven't changed much for Ningbo Huaxiang Electronic in recent years. Over the past five years, ROCE has remained relatively flat at around 9.4% and the business has deployed 51% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Ningbo Huaxiang Electronic's ROCE

Long story short, while Ningbo Huaxiang Electronic has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 50% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Ningbo Huaxiang Electronic does have some risks though, and we've spotted 1 warning sign for Ningbo Huaxiang Electronic that you might be interested in.

While Ningbo Huaxiang Electronic may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com