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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in HengbaoLtd's (SZSE:002104) returns on capital, so let's have a look.

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

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. To calculate this metric for HengbaoLtd, this is the formula:

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

0.049 = CN¥106m ÷ (CN¥2.3b - CN¥182m) (Based on the trailing twelve months to September 2024).

Thus, HengbaoLtd has an ROCE of 4.9%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for HengbaoLtd's ROCE against it's prior returns. If you'd like to look at how HengbaoLtd has performed in the past in other metrics, you can view this free graph of HengbaoLtd's past earnings, revenue and cash flow.

So How Is HengbaoLtd's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at HengbaoLtd promising. 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 211% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that HengbaoLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 14% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 1 warning sign for HengbaoLtd that we think you should be aware of.

While HengbaoLtd 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.