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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Rayitek Hi-Tech Film Company Shenzhen (SHSE:688323) 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. The formula for this calculation on Rayitek Hi-Tech Film Company Shenzhen is:

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

0.039 = CN¥60m ÷ (CN¥1.7b - CN¥196m) (Based on the trailing twelve months to March 2022).

Thus, Rayitek Hi-Tech Film Company Shenzhen has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 10.0%.

See our latest analysis for Rayitek Hi-Tech Film Company Shenzhen

Above you can see how the current ROCE for Rayitek Hi-Tech Film Company Shenzhen compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Rayitek Hi-Tech Film Company Shenzhen here for free.

What Does the ROCE Trend For Rayitek Hi-Tech Film Company Shenzhen Tell Us?

When we looked at the ROCE trend at Rayitek Hi-Tech Film Company Shenzhen, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.4% over the last three years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Rayitek Hi-Tech Film Company Shenzhen has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Rayitek Hi-Tech Film Company Shenzhen's ROCE

In summary, we're somewhat concerned by Rayitek Hi-Tech Film Company Shenzhen's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Rayitek Hi-Tech Film Company Shenzhen does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.