What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Guangdong Yussen Energy Technology (SZSE:002986) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Guangdong Yussen Energy Technology:

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

0.094 = CN¥489m ÷ (CN¥6.9b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Yussen Energy Technology has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Yussen Energy Technology's ROCE against it's prior returns. If you're interested in investigating Guangdong Yussen Energy Technology's past further, check out this free graph covering Guangdong Yussen Energy Technology's past earnings, revenue and cash flow.

What Can We Tell From Guangdong Yussen Energy Technology's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 25% five years ago, while the business's capital employed increased by 496%. Usually this isn't ideal, but given Guangdong Yussen Energy Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Guangdong Yussen Energy Technology's earnings and if they change as a result from the capital raise. Additionally, we found that Guangdong Yussen Energy Technology's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Guangdong Yussen Energy Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Guangdong Yussen Energy Technology (of which 1 shouldn't be ignored!) that you should know about.

While Guangdong Yussen Energy Technology 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