There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So on that note, Great Microwave Technology (SHSE:688270) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Great Microwave Technology, this is the formula:

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

0.012 = CN¥26m ÷ (CN¥2.2b - CN¥94m) (Based on the trailing twelve months to March 2024).

Therefore, Great Microwave Technology has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 3.9%.

Above you can see how the current ROCE for Great Microwave Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Great Microwave Technology .

The Trend Of ROCE

Great Microwave Technology has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. Not only that, but the company is utilizing 3,096% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.2%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Great Microwave Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Great Microwave Technology's ROCE

In summary, it's great to see that Great Microwave Technology has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 31% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Great Microwave Technology, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Great Microwave Technology 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.