To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Yealink Network Technology's (SZSE:300628) ROCE trend, we were very happy with what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Yealink Network Technology, this is the formula:

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

0.26 = CN¥2.0b ÷ (CN¥8.3b - CN¥643m) (Based on the trailing twelve months to September 2023).

Therefore, Yealink Network Technology has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

See our latest analysis for Yealink Network Technology

In the above chart we have measured Yealink Network Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

It's hard not to be impressed by Yealink Network Technology's returns on capital. The company has employed 132% more capital in the last five years, and the returns on that capital have remained stable at 26%. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

Yealink Network Technology has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 116% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Yealink Network Technology, we've spotted 2 warning signs, and 1 of them is potentially serious.

Yealink Network Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.