Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating ChinaEtek Service & Technology (SZSE:301208), 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. Analysts use this formula to calculate it for ChinaEtek Service & Technology:

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

0.091 = CN¥136m ÷ (CN¥1.8b - CN¥329m) (Based on the trailing twelve months to March 2024).

Therefore, ChinaEtek Service & Technology has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 3.9% generated by the IT industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for ChinaEtek Service & Technology's ROCE against it's prior returns. If you're interested in investigating ChinaEtek Service & Technology's past further, check out this free graph covering ChinaEtek Service & Technology's past earnings, revenue and cash flow.

What Can We Tell From ChinaEtek Service & Technology's ROCE Trend?

On the surface, the trend of ROCE at ChinaEtek Service & Technology doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 9.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a related note, ChinaEtek Service & Technology has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. 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 ChinaEtek Service & Technology's ROCE

In summary, ChinaEtek Service & Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 20% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think ChinaEtek Service & Technology has the makings of a multi-bagger.

ChinaEtek Service & Technology does have some risks, we noticed 2 warning signs (and 1 which is significant) we think 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.