Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Chengdu Haoneng Technology's (SHSE:603809) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Chengdu Haoneng Technology, this is the formula:

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

0.13 = CN¥489m ÷ (CN¥5.6b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Therefore, Chengdu Haoneng Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.9% it's much better.

In the above chart we have measured Chengdu Haoneng Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chengdu Haoneng Technology .

So How Is Chengdu Haoneng Technology's ROCE Trending?

Investors would be pleased with what's happening at Chengdu Haoneng Technology. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 109%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Chengdu Haoneng Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chengdu Haoneng Technology has. Since the stock has returned a staggering 280% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Chengdu Haoneng Technology that you might find interesting.

While Chengdu Haoneng Technology 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.