If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at HangZhou Everfine Photo-e-info (SZSE:300306) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HangZhou Everfine Photo-e-info is:

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

0.04 = CN¥60m ÷ (CN¥1.6b - CN¥145m) (Based on the trailing twelve months to June 2024).

Thus, HangZhou Everfine Photo-e-info has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for HangZhou Everfine Photo-e-info's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of HangZhou Everfine Photo-e-info.

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at HangZhou Everfine Photo-e-info promising. The figures show that over the last five years, ROCE has grown 34% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From HangZhou Everfine Photo-e-info's ROCE

To bring it all together, HangZhou Everfine Photo-e-info has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching HangZhou Everfine Photo-e-info, you might be interested to know about the 2 warning signs that our analysis has discovered.

While HangZhou Everfine Photo-e-info 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.