If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 HMT (Xiamen) New Technical Materials (SHSE:603306), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on HMT (Xiamen) New Technical Materials is:

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

0.065 = CN¥302m ÷ (CN¥4.9b - CN¥242m) (Based on the trailing twelve months to March 2024).

Therefore, HMT (Xiamen) New Technical Materials has an ROCE of 6.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

Above you can see how the current ROCE for HMT (Xiamen) New Technical Materials 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 HMT (Xiamen) New Technical Materials .

So How Is HMT (Xiamen) New Technical Materials' ROCE Trending?

We weren't thrilled with the trend because HMT (Xiamen) New Technical Materials' ROCE has reduced by 37% over the last five years, while the business employed 91% more capital. That being said, HMT (Xiamen) New Technical Materials raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. HMT (Xiamen) New Technical Materials probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On HMT (Xiamen) New Technical Materials' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HMT (Xiamen) New Technical Materials is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 49% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for HMT (Xiamen) New Technical Materials that we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com