There are a few key trends to look for if we want to identify the next 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. In light of that, when we looked at Guangzhou Risong Intelligent Technology Holding (SHSE:688090) and its ROCE trend, we weren't exactly thrilled.

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 Guangzhou Risong Intelligent Technology Holding:

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

0.0083 = CN¥8.2m ÷ (CN¥1.6b - CN¥605m) (Based on the trailing twelve months to March 2024).

Therefore, Guangzhou Risong Intelligent Technology Holding has an ROCE of 0.8%. Ultimately, that's a low return and it 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 Guangzhou Risong Intelligent Technology Holding's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangzhou Risong Intelligent Technology Holding.

How Are Returns Trending?

In terms of Guangzhou Risong Intelligent Technology Holding's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.8% from 10% five years ago. 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.

What We Can Learn From Guangzhou Risong Intelligent Technology Holding's ROCE

In summary, Guangzhou Risong Intelligent Technology Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 52% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for Guangzhou Risong Intelligent Technology Holding (2 shouldn't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.