If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Kehua Data's (SZSE:002335) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Kehua Data, this is the formula:

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

0.099 = CN¥778m ÷ (CN¥12b - CN¥4.4b) (Based on the trailing twelve months to September 2023).

So, Kehua Data has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 6.3% generated by the Electrical industry, it's much better.

View our latest analysis for Kehua Data

Above you can see how the current ROCE for Kehua Data compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kehua Data here for free.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 69% more capital is being employed now too. So we're very much inspired by what we're seeing at Kehua Data thanks to its ability to profitably reinvest capital.

Our Take On Kehua Data's ROCE

In summary, it's great to see that Kehua Data can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Kehua Data can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for Kehua Data you'll probably want to know about.

While Kehua Data 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.