If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Oxygen Plant GroupLtd (SZSE:002430), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Hangzhou Oxygen Plant GroupLtd, this is the formula:

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

0.075 = CN¥1.0b ÷ (CN¥22b - CN¥8.1b) (Based on the trailing twelve months to September 2023).

Thus, Hangzhou Oxygen Plant GroupLtd has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 6.0% generated by the Chemicals industry, it's much better.

Above you can see how the current ROCE for Hangzhou Oxygen Plant GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou Oxygen Plant GroupLtd .

So How Is Hangzhou Oxygen Plant GroupLtd's ROCE Trending?

On the surface, the trend of ROCE at Hangzhou Oxygen Plant GroupLtd doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Hangzhou Oxygen Plant GroupLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 134% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Hangzhou Oxygen Plant GroupLtd does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Hangzhou Oxygen Plant GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.