If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Hynar Water Group (SZSE:300961), it didn't seem to tick all of these boxes.

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

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 Hynar Water Group is:

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

0.011 = CN¥20m ÷ (CN¥2.9b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Therefore, Hynar Water Group has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.6%.

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

The Trend Of ROCE

On the surface, the trend of ROCE at Hynar Water Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.1% from 16% five years ago. However it looks like Hynar Water Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

In summary, Hynar Water Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 53% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Hynar Water Group we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Hynar Water Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.