If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 on that note, Hangzhou Changchuan TechnologyLtd (SZSE:300604) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Hangzhou Changchuan TechnologyLtd is:

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

0.052 = CN¥214m ÷ (CN¥6.7b - CN¥2.5b) (Based on the trailing twelve months to June 2024).

Therefore, Hangzhou Changchuan TechnologyLtd has an ROCE of 5.2%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

Above you can see how the current ROCE for Hangzhou Changchuan TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hangzhou Changchuan TechnologyLtd for free.

What Can We Tell From Hangzhou Changchuan TechnologyLtd's ROCE Trend?

We're delighted to see that Hangzhou Changchuan TechnologyLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.2% on its capital. In addition to that, Hangzhou Changchuan TechnologyLtd is employing 768% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

To the delight of most shareholders, Hangzhou Changchuan TechnologyLtd has now broken into profitability. And a remarkable 118% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Hangzhou Changchuan TechnologyLtd, we've discovered 1 warning sign that you should be aware of.

While Hangzhou Changchuan TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.