To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Xiamen R&T Plumbing TechnologyLtd (SZSE:002790) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Xiamen R&T Plumbing TechnologyLtd is:

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

0.085 = CN¥189m ÷ (CN¥2.7b - CN¥516m) (Based on the trailing twelve months to June 2024).

Therefore, Xiamen R&T Plumbing TechnologyLtd has an ROCE of 8.5%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

Above you can see how the current ROCE for Xiamen R&T Plumbing TechnologyLtd 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 Xiamen R&T Plumbing TechnologyLtd .

What Can We Tell From Xiamen R&T Plumbing TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Xiamen R&T Plumbing TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.5% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Xiamen R&T Plumbing TechnologyLtd's ROCE

While returns have fallen for Xiamen R&T Plumbing TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 12% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching Xiamen R&T Plumbing TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Xiamen R&T Plumbing 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.