To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangdong Hongtu Technology (holdings)Ltd (SZSE:002101), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Guangdong Hongtu Technology (holdings)Ltd:

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

0.056 = CN¥476m ÷ (CN¥12b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

So, Guangdong Hongtu Technology (holdings)Ltd has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

View our latest analysis for Guangdong Hongtu Technology (holdings)Ltd

In the above chart we have measured Guangdong Hongtu Technology (holdings)Ltd'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.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Guangdong Hongtu Technology (holdings)Ltd's ROCE has reduced by 46% over the last five years, while the business employed 62% more capital. That being said, Guangdong Hongtu Technology (holdings)Ltd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Guangdong Hongtu Technology (holdings)Ltd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Guangdong Hongtu Technology (holdings)Ltd's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Hongtu Technology (holdings)Ltd's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 124% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Guangdong Hongtu Technology (holdings)Ltd that we think 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.