If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Guangzhou Metro Design & Research Institute's (SZSE:003013) trend of ROCE, we really liked what we saw.

Understanding 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. 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)

0.20 = CN¥533m ÷ (CN¥5.9b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

Therefore, Guangzhou Metro Design & Research Institute has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 6.1% earned by companies in a similar industry.

Above you can see how the current ROCE for Guangzhou Metro Design & Research Institute 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 Guangzhou Metro Design & Research Institute .

What Does the ROCE Trend For Guangzhou Metro Design & Research Institute Tell Us?

Guangzhou Metro Design & Research Institute deserves to be commended in regards to it's returns. The company has employed 146% more capital in the last five years, and the returns on that capital have remained stable at 20%. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 55% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 55%, some of that risk is still prevalent.

The Key Takeaway

In short, we'd argue Guangzhou Metro Design & Research Institute has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last three years the stock has declined 14%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a separate note, we've found 2 warning signs for Guangzhou Metro Design & Research Institute you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.