If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of G-bits Network Technology (Xiamen) (SHSE:603444) looks attractive right now, so lets see what the trend of returns can tell us.

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 G-bits Network Technology (Xiamen), this is the formula:

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

0.25 = CN¥1.4b ÷ (CN¥7.0b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Therefore, G-bits Network Technology (Xiamen) has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 5.4%.

In the above chart we have measured G-bits Network Technology (Xiamen)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for G-bits Network Technology (Xiamen) .

What Can We Tell From G-bits Network Technology (Xiamen)'s ROCE Trend?

In terms of G-bits Network Technology (Xiamen)'s history of ROCE, it's quite impressive. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 60% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

In short, we'd argue G-bits Network Technology (Xiamen) has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last five years the stock has declined 13%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

While G-bits Network Technology (Xiamen) looks impressive, no company is worth an infinite price. The intrinsic value infographic for 603444 helps visualize whether it is currently trading for a fair price.

G-bits Network Technology (Xiamen) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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