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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Hubei W-olf Photoelectric Technology (SZSE:002962), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Hubei W-olf Photoelectric Technology is:

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

0.017 = CN¥33m ÷ (CN¥2.0b - CN¥130m) (Based on the trailing twelve months to March 2023).

Thus, Hubei W-olf Photoelectric Technology has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.9%.

View our latest analysis for Hubei W-olf Photoelectric Technology

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

How Are Returns Trending?

When we looked at the ROCE trend at Hubei W-olf Photoelectric Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.7% from 24% five years ago. However it looks like Hubei W-olf Photoelectric Technology 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.

On a side note, Hubei W-olf Photoelectric Technology has done well to pay down its current liabilities to 6.5% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Hubei W-olf Photoelectric Technology's ROCE

In summary, Hubei W-olf Photoelectric Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a final note, we found 3 warning signs for Hubei W-olf Photoelectric Technology (1 is a bit concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.