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. 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. In light of that, when we looked at Guangdong KinLong Hardware ProductsLtd (SZSE:002791) 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 Guangdong KinLong Hardware ProductsLtd:

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

0.067 = CN¥380m ÷ (CN¥9.5b - CN¥3.8b) (Based on the trailing twelve months to June 2024).

So, Guangdong KinLong Hardware ProductsLtd has an ROCE of 6.7%. On its own, that's a low figure but it's around the 7.7% average generated by the Building industry.

Above you can see how the current ROCE for Guangdong KinLong Hardware ProductsLtd 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 Guangdong KinLong Hardware ProductsLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Guangdong KinLong Hardware ProductsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.7% from 10% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Guangdong KinLong Hardware ProductsLtd has a high ratio of current liabilities to total assets of 40%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Guangdong KinLong Hardware ProductsLtd's ROCE

To conclude, we've found that Guangdong KinLong Hardware ProductsLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 7.2% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Guangdong KinLong Hardware ProductsLtd that you might find interesting.

While Guangdong KinLong Hardware ProductsLtd 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.