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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, WenYi Trinity Technology (SHSE:600520) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for WenYi Trinity Technology:

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

0.048 = CN¥18m ÷ (CN¥564m - CN¥184m) (Based on the trailing twelve months to September 2024).

Therefore, WenYi Trinity Technology has an ROCE of 4.8%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for WenYi Trinity Technology's ROCE against it's prior returns. If you're interested in investigating WenYi Trinity Technology's past further, check out this free graph covering WenYi Trinity Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that WenYi Trinity Technology is reaping rewards from its investments and has now broken into profitability. The company now earns 4.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by WenYi Trinity Technology has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On WenYi Trinity Technology's ROCE

To sum it up, WenYi Trinity Technology is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with WenYi Trinity Technology (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While WenYi Trinity 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.