There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at GuangDong Leary New Material TechnologyLtd (SHSE:688683) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 GuangDong Leary New Material TechnologyLtd, this is the formula:

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

0.021 = CN¥25m ÷ (CN¥1.4b - CN¥152m) (Based on the trailing twelve months to September 2024).

Therefore, GuangDong Leary New Material TechnologyLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangDong Leary New Material TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how GuangDong Leary New Material TechnologyLtd has performed in the past in other metrics, you can view this free graph of GuangDong Leary New Material TechnologyLtd's past earnings, revenue and cash flow.

So How Is GuangDong Leary New Material TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at GuangDong Leary New Material TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like GuangDong Leary New Material TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by GuangDong Leary New Material TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 19% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing GuangDong Leary New Material TechnologyLtd that you might find interesting.

While GuangDong Leary New Material TechnologyLtd 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.

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