If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Guangzhou Metro Design & Research Institute (SZSE:003013), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Guangzhou Metro Design & Research Institute is:

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

0.19 = CN¥495m ÷ (CN¥5.4b - CN¥2.7b) (Based on the trailing twelve months to March 2024).

Thus, Guangzhou Metro Design & Research Institute has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Construction industry.

In the above chart we have measured Guangzhou Metro Design & Research Institute's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Metro Design & Research Institute .

The Trend Of ROCE

In terms of Guangzhou Metro Design & Research Institute's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 19%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Guangzhou Metro Design & Research Institute has done well to pay down its current liabilities to 51% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 51% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Guangzhou Metro Design & Research Institute's ROCE

To conclude, we've found that Guangzhou Metro Design & Research Institute is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 15% in the last three years. Therefore based on the analysis done in this article, we don't think Guangzhou Metro Design & Research Institute has the makings of a multi-bagger.

If you want to know some of the risks facing Guangzhou Metro Design & Research Institute we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Guangzhou Metro Design & Research Institute 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