There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hangzhou Honghua Digital Technology Stock (SHSE:688789) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Hangzhou Honghua Digital Technology Stock is:

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

0.13 = CN¥422m ÷ (CN¥4.0b - CN¥838m) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Honghua Digital Technology Stock has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.2% it's much better.

In the above chart we have measured Hangzhou Honghua Digital Technology Stock's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hangzhou Honghua Digital Technology Stock for free.

So How Is Hangzhou Honghua Digital Technology Stock's ROCE Trending?

When we looked at the ROCE trend at Hangzhou Honghua Digital Technology Stock, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Honghua Digital Technology Stock 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 48% 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.

Hangzhou Honghua Digital Technology Stock does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.