What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Luolai Lifestyle Technology (SZSE:002293) 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. Analysts use this formula to calculate it for Luolai Lifestyle Technology:

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

0.11 = CN¥516m ÷ (CN¥6.4b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

So, Luolai Lifestyle Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Luxury industry.

Above you can see how the current ROCE for Luolai Lifestyle 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 Luolai Lifestyle Technology .

The Trend Of ROCE

Over the past five years, Luolai Lifestyle Technology's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Luolai Lifestyle Technology to be a multi-bagger going forward.

Our Take On Luolai Lifestyle Technology's ROCE

In summary, Luolai Lifestyle Technology isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Luolai Lifestyle Technology has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Luolai Lifestyle Technology that we think you should be aware of.

While Luolai Lifestyle 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.