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 investigating Hefei Kewell Power SystemLtd (SHSE:688551), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hefei Kewell Power SystemLtd:

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

0.057 = CN¥77m ÷ (CN¥1.8b - CN¥408m) (Based on the trailing twelve months to March 2024).

So, Hefei Kewell Power SystemLtd has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.2%.

Above you can see how the current ROCE for Hefei Kewell Power SystemLtd 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 Hefei Kewell Power SystemLtd .

What Can We Tell From Hefei Kewell Power SystemLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 29% five years ago, while the business's capital employed increased by 801%. Usually this isn't ideal, but given Hefei Kewell Power SystemLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Hefei Kewell Power SystemLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hefei Kewell Power SystemLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 14% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 3 warning signs for Hefei Kewell Power SystemLtd (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.