There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Q Technology (Group) (HKG:1478), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Q Technology (Group) is:

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

0.035 = CN¥186m ÷ (CN¥14b - CN¥8.6b) (Based on the trailing twelve months to June 2024).

So, Q Technology (Group) has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.4%.

In the above chart we have measured Q Technology (Group)'s 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 Q Technology (Group) .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Q Technology (Group), we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 3.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Q Technology (Group) has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Q Technology (Group)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Q Technology (Group) is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 50% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Q Technology (Group) does have some risks though, and we've spotted 2 warning signs for Q Technology (Group) that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.