To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think ShenZhen YUTO Packaging Technology (SZSE:002831) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ShenZhen YUTO Packaging Technology:

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

0.14 = CN¥1.9b ÷ (CN¥21b - CN¥7.9b) (Based on the trailing twelve months to March 2024).

So, ShenZhen YUTO Packaging Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 4.7% generated by the Packaging industry.

Above you can see how the current ROCE for ShenZhen YUTO Packaging Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for ShenZhen YUTO Packaging Technology .

What Can We Tell From ShenZhen YUTO Packaging Technology's ROCE Trend?

On the surface, the trend of ROCE at ShenZhen YUTO Packaging Technology doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 14%. 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by ShenZhen YUTO Packaging Technology's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 37% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

ShenZhen YUTO Packaging Technology does have some risks though, and we've spotted 1 warning sign for ShenZhen YUTO Packaging Technology that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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