To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Hunan Copote Science TechnologyLtd (SHSE:600476) looks quite promising in regards to its trends of return on capital.

Understanding 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 Hunan Copote Science TechnologyLtd is:

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

0.10 = CN¥34m ÷ (CN¥1.1b - CN¥806m) (Based on the trailing twelve months to September 2024).

Thus, Hunan Copote Science TechnologyLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 3.7% it's much better.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hunan Copote Science TechnologyLtd's past further, check out this free graph covering Hunan Copote Science TechnologyLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

Hunan Copote Science TechnologyLtd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 10% which is a sight for sore eyes. Not only that, but the company is utilizing 47% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 71% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Hunan Copote Science TechnologyLtd's ROCE

In summary, it's great to see that Hunan Copote Science TechnologyLtd has managed to break into profitability and is continuing to reinvest in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 2 warning signs with Hunan Copote Science TechnologyLtd and understanding these should be part of your investment process.

While Hunan Copote Science TechnologyLtd 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.