If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Keystone TechnologyLtd (SHSE:605588), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Keystone TechnologyLtd, this is the formula:

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

0.047 = CN¥55m ÷ (CN¥1.7b - CN¥536m) (Based on the trailing twelve months to September 2023).

Thus, Keystone TechnologyLtd has an ROCE of 4.7%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.

View our latest analysis for Keystone TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Keystone TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Keystone TechnologyLtd, check out these free graphs here.

How Are Returns Trending?

We weren't thrilled with the trend because Keystone TechnologyLtd's ROCE has reduced by 83% over the last five years, while the business employed 369% more capital. Usually this isn't ideal, but given Keystone TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Keystone TechnologyLtd's earnings and if they change as a result from the capital raise.

Our Take On Keystone TechnologyLtd's ROCE

We're a bit apprehensive about Keystone TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 82% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 3 warning signs for Keystone TechnologyLtd you'll probably want to know about.

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.