If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Longshine Technology Group (SZSE:300682), we don't think it's current trends fit the mold of a multi-bagger.

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 Longshine Technology Group:

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

0.04 = CN¥329m ÷ (CN¥10b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

So, Longshine Technology Group has an ROCE of 4.0%. On its own that's a low return, but compared to the average of 2.7% generated by the Software industry, it's much better.

In the above chart we have measured Longshine Technology Group'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 Longshine Technology Group for free.

How Are Returns Trending?

We weren't thrilled with the trend because Longshine Technology Group's ROCE has reduced by 46% over the last five years, while the business employed 97% more capital. Usually this isn't ideal, but given Longshine Technology Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Longshine Technology Group might not have received a full period of earnings contribution from it.

The Bottom Line On Longshine Technology Group's ROCE

To conclude, we've found that Longshine Technology Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Longshine Technology Group has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Longshine Technology Group and understanding these should be part of your investment process.

While Longshine Technology Group 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.