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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at ChangYuan Technology Group (SHSE:600525) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for ChangYuan Technology Group, this is the formula:

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

0.062 = CN¥388m ÷ (CN¥16b - CN¥10b) (Based on the trailing twelve months to March 2024).

Therefore, ChangYuan Technology Group has an ROCE of 6.2%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

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

What Does the ROCE Trend For ChangYuan Technology Group Tell Us?

You'd find it hard not to be impressed with the ROCE trend at ChangYuan Technology Group. The data shows that returns on capital have increased by 5,261% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 29% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 62% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In a nutshell, we're pleased to see that ChangYuan Technology Group has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing ChangYuan Technology Group we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

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.