To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Shanghai Aohua Photoelectricity Endoscope (SHSE:688212) so let's look a bit deeper.

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 Shanghai Aohua Photoelectricity Endoscope is:

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

0.02 = CN¥28m ÷ (CN¥1.5b - CN¥117m) (Based on the trailing twelve months to September 2023).

So, Shanghai Aohua Photoelectricity Endoscope has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 7.4%.

View our latest analysis for Shanghai Aohua Photoelectricity Endoscope

In the above chart we have measured Shanghai Aohua Photoelectricity Endoscope's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Aohua Photoelectricity Endoscope.

What Does the ROCE Trend For Shanghai Aohua Photoelectricity Endoscope Tell Us?

The fact that Shanghai Aohua Photoelectricity Endoscope is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.0% on its capital. Not only that, but the company is utilizing 252% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Shanghai Aohua Photoelectricity Endoscope's ROCE

Long story short, we're delighted to see that Shanghai Aohua Photoelectricity Endoscope's reinvestment activities have paid off and the company is now profitable. And with a respectable 13% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Shanghai Aohua Photoelectricity Endoscope you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.