Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at China Transinfo Technology (SZSE:002373) and its ROCE trend, we weren't exactly thrilled.

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

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 China Transinfo Technology, this is the formula:

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

0.0087 = CN¥115m ÷ (CN¥19b - CN¥5.5b) (Based on the trailing twelve months to March 2024).

Therefore, China Transinfo Technology has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 4.0%.

Above you can see how the current ROCE for China Transinfo Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for China Transinfo Technology .

The Trend Of ROCE

In terms of China Transinfo Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.9% from 9.2% five years ago. However it looks like China Transinfo Technology 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On China Transinfo Technology's ROCE

Bringing it all together, while we're somewhat encouraged by China Transinfo Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 53% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

China Transinfo Technology does have some risks though, and we've spotted 1 warning sign for China Transinfo Technology that you might be interested in.

While China Transinfo Technology 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.