There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Hi-Trend Technology (Shanghai) (SHSE:688391), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hi-Trend Technology (Shanghai):

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

0.056 = CN¥114m ÷ (CN¥2.2b - CN¥114m) (Based on the trailing twelve months to September 2023).

Thus, Hi-Trend Technology (Shanghai) has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 4.2% generated by the Semiconductor industry, it's much better.

See our latest analysis for Hi-Trend Technology (Shanghai)

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

So How Is Hi-Trend Technology (Shanghai)'s ROCE Trending?

When we looked at the ROCE trend at Hi-Trend Technology (Shanghai), we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Hi-Trend Technology (Shanghai) 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'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.

On a related note, Hi-Trend Technology (Shanghai) has decreased its current liabilities to 5.3% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Hi-Trend Technology (Shanghai)'s ROCE

Bringing it all together, while we're somewhat encouraged by Hi-Trend Technology (Shanghai)'s reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last year. Therefore based on the analysis done in this article, we don't think Hi-Trend Technology (Shanghai) has the makings of a multi-bagger.

If you'd like to know more about Hi-Trend Technology (Shanghai), we've spotted 2 warning signs, and 1 of them can't be ignored.

While Hi-Trend Technology (Shanghai) 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.