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. However, after briefly looking over the numbers, we don't think China Railway Harbin Group of Technology (SHSE:688459) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for China Railway Harbin Group of Technology:

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

0.03 = CN¥103m ÷ (CN¥3.9b - CN¥450m) (Based on the trailing twelve months to September 2024).

Therefore, China Railway Harbin Group of Technology has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

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 China Railway Harbin Group of Technology's past further, check out this free graph covering China Railway Harbin Group of Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at China Railway Harbin Group of Technology doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, China Railway Harbin Group of Technology has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Railway Harbin Group of Technology. In light of this, the stock has only gained 5.3% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, China Railway Harbin Group of Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.