What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Guangdong HEC Technology Holding (SHSE:600673), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Guangdong HEC Technology Holding, this is the formula:

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

0.016 = CN¥229m ÷ (CN¥26b - CN¥12b) (Based on the trailing twelve months to September 2023).

Thus, Guangdong HEC Technology Holding has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.2%.

Check out our latest analysis for Guangdong HEC Technology Holding

In the above chart we have measured Guangdong HEC Technology Holding'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 Guangdong HEC Technology Holding.

What Does the ROCE Trend For Guangdong HEC Technology Holding Tell Us?

When we looked at the ROCE trend at Guangdong HEC Technology Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 20% five years ago. However it looks like Guangdong HEC Technology Holding 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 may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Guangdong HEC Technology Holding has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Guangdong HEC Technology Holding's ROCE

To conclude, we've found that Guangdong HEC Technology Holding is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Guangdong HEC Technology Holding (of which 1 shouldn't be ignored!) that you should know about.

While Guangdong HEC Technology Holding isn't earning the highest return, check out this free list of companies that are 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.