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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Hangzhou EZVIZ Network (SHSE:688475) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Hangzhou EZVIZ Network:

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

0.083 = CN¥493m ÷ (CN¥7.9b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Thus, Hangzhou EZVIZ Network has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 5.3% generated by the Electronic industry, it's much better.

In the above chart we have measured Hangzhou EZVIZ Network's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hangzhou EZVIZ Network for free.

What Does the ROCE Trend For Hangzhou EZVIZ Network Tell Us?

On the surface, the trend of ROCE at Hangzhou EZVIZ Network doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 8.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Hangzhou EZVIZ Network has done well to pay down its current liabilities to 25% of total assets. Since the ratio used to be 75%, that's a significant reduction and it no doubt explains the drop in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Hangzhou EZVIZ Network's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hangzhou EZVIZ Network. Furthermore the stock has climbed 8.1% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Hangzhou EZVIZ Network does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.