If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Puyang Huicheng Electronic Material (SZSE:300481) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Puyang Huicheng Electronic Material is:

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

0.072 = CN¥193m ÷ (CN¥2.9b - CN¥216m) (Based on the trailing twelve months to March 2024).

So, Puyang Huicheng Electronic Material has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

Above you can see how the current ROCE for Puyang Huicheng Electronic Material 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 Puyang Huicheng Electronic Material .

What Does the ROCE Trend For Puyang Huicheng Electronic Material Tell Us?

In terms of Puyang Huicheng Electronic Material's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.2% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Puyang Huicheng Electronic Material has decreased its current liabilities to 7.5% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Puyang Huicheng Electronic Material's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Puyang Huicheng Electronic Material have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 23% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 3 warning signs for Puyang Huicheng Electronic Material that we think you should be aware of.

While Puyang Huicheng Electronic Material 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com