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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Hangzhou Alltest Biotech (SHSE:688606) 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 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 Hangzhou Alltest Biotech:

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

0.03 = CN¥117m ÷ (CN¥4.1b - CN¥286m) (Based on the trailing twelve months to March 2024).

So, Hangzhou Alltest Biotech has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 7.0%.

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

How Are Returns Trending?

When we looked at the ROCE trend at Hangzhou Alltest Biotech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.0% from 27% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Hangzhou Alltest Biotech's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Hangzhou Alltest Biotech does come with some risks, and we've found 3 warning signs that you should be aware of.

While Hangzhou Alltest Biotech 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.