If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So while Hefei Meyer Optoelectronic Technology (SZSE:002690) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hefei Meyer Optoelectronic Technology:

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

0.24 = CN¥637m ÷ (CN¥3.2b - CN¥544m) (Based on the trailing twelve months to September 2024).

Thus, Hefei Meyer Optoelectronic Technology has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

In the above chart we have measured Hefei Meyer Optoelectronic Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hefei Meyer Optoelectronic Technology for free.

What Does the ROCE Trend For Hefei Meyer Optoelectronic Technology Tell Us?

Over the past five years, Hefei Meyer Optoelectronic Technology's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward. On top of that you'll notice that Hefei Meyer Optoelectronic Technology has been paying out a large portion (75%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Our Take On Hefei Meyer Optoelectronic Technology's ROCE

While Hefei Meyer Optoelectronic Technology has impressive profitability from its capital, it isn't increasing that amount of capital. Since the stock has declined 36% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Hefei Meyer Optoelectronic Technology you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.