Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Hengerda New Materials (Fujian) (SZSE:300946), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hengerda New Materials (Fujian), this is the formula:

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

0.085 = CN¥102m ÷ (CN¥1.5b - CN¥301m) (Based on the trailing twelve months to June 2024).

So, Hengerda New Materials (Fujian) has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

Above you can see how the current ROCE for Hengerda New Materials (Fujian) 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 Hengerda New Materials (Fujian) .

What Does the ROCE Trend For Hengerda New Materials (Fujian) Tell Us?

On the surface, the trend of ROCE at Hengerda New Materials (Fujian) doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 8.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Hengerda New Materials (Fujian) is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 33% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 2 warning signs with Hengerda New Materials (Fujian) (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Hengerda New Materials (Fujian) 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.