If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, we've noticed some promising trends at HyUnion HoldingLtd (SZSE:002537) so let's look a bit deeper.

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 HyUnion HoldingLtd is:

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

0.067 = CN¥313m ÷ (CN¥8.7b - CN¥4.0b) (Based on the trailing twelve months to September 2024).

Therefore, HyUnion HoldingLtd has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how HyUnion HoldingLtd has performed in the past in other metrics, you can view this free graph of HyUnion HoldingLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For HyUnion HoldingLtd Tell Us?

HyUnion HoldingLtd has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 227%. The company is now earning CN¥0.07 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 28% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From HyUnion HoldingLtd's ROCE

In the end, HyUnion HoldingLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 10% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 2 warning signs facing HyUnion HoldingLtd that you might find interesting.

While HyUnion HoldingLtd isn't earning the highest return, check out this free list of companies that are 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.