Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangdong Rifeng Electric Cable (SZSE:002953), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guangdong Rifeng Electric Cable:

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

0.085 = CN¥175m ÷ (CN¥3.3b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong Rifeng Electric Cable has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Rifeng Electric Cable's ROCE against it's prior returns. If you're interested in investigating Guangdong Rifeng Electric Cable's past further, check out this free graph covering Guangdong Rifeng Electric Cable's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Guangdong Rifeng Electric Cable, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.5%. However it looks like Guangdong Rifeng Electric Cable 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'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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Guangdong Rifeng Electric Cable's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Rifeng Electric Cable's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 10% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Guangdong Rifeng Electric Cable, we've discovered 1 warning sign that you should be aware of.

While Guangdong Rifeng Electric Cable 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.