What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Bichamp Cutting Technology (Hunan) (SZSE:002843), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Bichamp Cutting Technology (Hunan), this is the formula:

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

0.06 = CN¥106m ÷ (CN¥2.7b - CN¥940m) (Based on the trailing twelve months to December 2023).

Thus, Bichamp Cutting Technology (Hunan) has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

Above you can see how the current ROCE for Bichamp Cutting Technology (Hunan) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Bichamp Cutting Technology (Hunan) for free.

What Can We Tell From Bichamp Cutting Technology (Hunan)'s ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.5% five years ago, while the business's capital employed increased by 151%. That being said, Bichamp Cutting Technology (Hunan) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Bichamp Cutting Technology (Hunan) 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 side note, Bichamp Cutting Technology (Hunan)'s current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bichamp Cutting Technology (Hunan). Furthermore the stock has climbed 76% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 4 warning signs for Bichamp Cutting Technology (Hunan) that we think you should be aware of.

While Bichamp Cutting Technology (Hunan) 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.

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