If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think GCL Energy TechnologyLtd (SZSE:002015) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on GCL Energy TechnologyLtd is:

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

0.04 = CN¥1.0b ÷ (CN¥36b - CN¥11b) (Based on the trailing twelve months to March 2024).

Thus, GCL Energy TechnologyLtd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.9%.

In the above chart we have measured GCL Energy TechnologyLtd'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 GCL Energy TechnologyLtd for free.

How Are Returns Trending?

When we looked at the ROCE trend at GCL Energy TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.5% over the last five years. However it looks like GCL Energy TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Key Takeaway

To conclude, we've found that GCL Energy TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 50% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing GCL Energy TechnologyLtd we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While GCL Energy TechnologyLtd 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.

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