To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Sino Wealth Electronic (SZSE:300327) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Sino Wealth Electronic, this is the formula:

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

0.0071 = CN¥13m ÷ (CN¥2.2b - CN¥426m) (Based on the trailing twelve months to September 2024).

Therefore, Sino Wealth Electronic has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.9%.

Above you can see how the current ROCE for Sino Wealth Electronic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sino Wealth Electronic .

How Are Returns Trending?

On the surface, the trend of ROCE at Sino Wealth Electronic doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.7% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Sino Wealth Electronic's ROCE

To conclude, we've found that Sino Wealth Electronic is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Sino Wealth Electronic, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Sino Wealth Electronic 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.