If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Hangzhou Tianyuan Pet Products (SZSE:301335), 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 Hangzhou Tianyuan Pet Products, this is the formula:

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

0.046 = CN¥98m ÷ (CN¥2.6b - CN¥518m) (Based on the trailing twelve months to September 2023).

Thus, Hangzhou Tianyuan Pet Products has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.

Above you can see how the current ROCE for Hangzhou Tianyuan Pet Products 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 Hangzhou Tianyuan Pet Products here for free.

So How Is Hangzhou Tianyuan Pet Products' ROCE Trending?

When we looked at the ROCE trend at Hangzhou Tianyuan Pet Products, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 19% five years ago. However it looks like Hangzhou Tianyuan Pet Products 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Hangzhou Tianyuan Pet Products' ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Tianyuan Pet Products' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hangzhou Tianyuan Pet Products (of which 1 is potentially serious!) that you should 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.