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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Hefei Meyer Optoelectronic Technology's (SZSE:002690) returns on capital, so let's have a look.

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. The formula for this calculation on Hefei Meyer Optoelectronic Technology is:

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

0.24 = CN¥698m ÷ (CN¥3.4b - CN¥511m) (Based on the trailing twelve months to March 2024).

Thus, Hefei Meyer Optoelectronic Technology has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 5.6% earned by companies in a similar industry.

Above you can see how the current ROCE for Hefei Meyer Optoelectronic Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hefei Meyer Optoelectronic Technology for free.

What Does the ROCE Trend For Hefei Meyer Optoelectronic Technology Tell Us?

Hefei Meyer Optoelectronic Technology's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 33% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Hefei Meyer Optoelectronic Technology's ROCE

To bring it all together, Hefei Meyer Optoelectronic Technology has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 21% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Hefei Meyer Optoelectronic Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

Hefei Meyer Optoelectronic Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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