What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Fiberhome Telecommunication Technologies (SHSE:600498) 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 Fiberhome Telecommunication Technologies is:

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

0.036 = CN¥748m ÷ (CN¥42b - CN¥22b) (Based on the trailing twelve months to June 2024).

Therefore, Fiberhome Telecommunication Technologies has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.6%.

Above you can see how the current ROCE for Fiberhome Telecommunication Technologies 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 Fiberhome Telecommunication Technologies .

So How Is Fiberhome Telecommunication Technologies' ROCE Trending?

On the surface, the trend of ROCE at Fiberhome Telecommunication Technologies doesn't inspire confidence. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 3.6%. However it looks like Fiberhome Telecommunication Technologies 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.

On a side note, Fiberhome Telecommunication Technologies' current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Fiberhome Telecommunication Technologies' ROCE

To conclude, we've found that Fiberhome Telecommunication Technologies is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 52% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Fiberhome Telecommunication Technologies, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.