Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Huaqin Technology (SHSE:603296) 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. The formula for this calculation on Huaqin Technology is:

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

0.091 = CN¥2.2b ÷ (CN¥59b - CN¥35b) (Based on the trailing twelve months to June 2024).

Therefore, Huaqin Technology has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Tech industry average of 5.8%.

Above you can see how the current ROCE for Huaqin Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Huaqin Technology .

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 378%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Huaqin Technology has decreased current liabilities to 60% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Huaqin Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On Huaqin Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Huaqin Technology has. Given the stock has declined 11% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

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

While Huaqin Technology 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.