There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangzhou Haozhi IndustrialLtd (SZSE:300503), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Guangzhou Haozhi IndustrialLtd:

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

0.019 = CN¥32m ÷ (CN¥2.6b - CN¥930m) (Based on the trailing twelve months to June 2024).

Thus, Guangzhou Haozhi IndustrialLtd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Guangzhou Haozhi IndustrialLtd's past further, check out this free graph covering Guangzhou Haozhi IndustrialLtd's past earnings, revenue and cash flow.

So How Is Guangzhou Haozhi IndustrialLtd's ROCE Trending?

On the surface, the trend of ROCE at Guangzhou Haozhi IndustrialLtd doesn't inspire confidence. Around five years ago the returns on capital were 3.7%, but since then they've fallen to 1.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangzhou Haozhi IndustrialLtd. Furthermore the stock has climbed 53% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 2 warning signs for Guangzhou Haozhi IndustrialLtd you'll probably want to know about.

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.