To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Hubei Kailong Chemical Group's (SZSE:002783) returns on capital, so let's have a look.

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

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. Analysts use this formula to calculate it for Hubei Kailong Chemical Group:

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

0.10 = CN¥380m ÷ (CN¥7.5b - CN¥3.8b) (Based on the trailing twelve months to September 2023).

So, Hubei Kailong Chemical Group has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.8% it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hubei Kailong Chemical Group's ROCE against it's prior returns. If you're interested in investigating Hubei Kailong Chemical Group's past further, check out this free graph covering Hubei Kailong Chemical Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hubei Kailong Chemical Group Tell Us?

The trends we've noticed at Hubei Kailong Chemical Group are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In summary, it's great to see that Hubei Kailong Chemical Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Hubei Kailong Chemical Group, we've spotted 4 warning signs, and 2 of them can't be ignored.

While Hubei Kailong Chemical Group 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.