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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Qingdao Paguld Intelligent ManufacturingLtd (SZSE:301456), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Qingdao Paguld Intelligent ManufacturingLtd, this is the formula:

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

0.038 = CN¥80m ÷ (CN¥2.2b - CN¥137m) (Based on the trailing twelve months to March 2024).

So, Qingdao Paguld Intelligent ManufacturingLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

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

So How Is Qingdao Paguld Intelligent ManufacturingLtd's ROCE Trending?

When we looked at the ROCE trend at Qingdao Paguld Intelligent ManufacturingLtd, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 3.8%. 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 side note, Qingdao Paguld Intelligent ManufacturingLtd has done well to pay down its current liabilities to 6.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, Qingdao Paguld Intelligent ManufacturingLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Qingdao Paguld Intelligent ManufacturingLtd does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Qingdao Paguld Intelligent ManufacturingLtd 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.

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