To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Hang Xiao Steel StructureLtd (SHSE:600477), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Hang Xiao Steel StructureLtd, this is the formula:

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

0.065 = CN¥462m ÷ (CN¥16b - CN¥8.5b) (Based on the trailing twelve months to March 2024).

So, Hang Xiao Steel StructureLtd has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Construction industry average of 6.5%.

In the above chart we have measured Hang Xiao Steel StructureLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hang Xiao Steel StructureLtd .

What Does the ROCE Trend For Hang Xiao Steel StructureLtd Tell Us?

When we looked at the ROCE trend at Hang Xiao Steel StructureLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Hang Xiao Steel StructureLtd 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 may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Hang Xiao Steel StructureLtd has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Hang Xiao Steel StructureLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Hang Xiao Steel StructureLtd'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 20% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Hang Xiao Steel StructureLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Hang Xiao Steel StructureLtd 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.