What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 investigating Huapont Life SciencesLtd (SZSE:002004), we don't think it's current trends fit the mold of a multi-bagger.

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 Huapont Life SciencesLtd is:

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

0.056 = CN¥1.1b ÷ (CN¥31b - CN¥11b) (Based on the trailing twelve months to September 2024).

So, Huapont Life SciencesLtd has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Chemicals 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'd like to look at how Huapont Life SciencesLtd has performed in the past in other metrics, you can view this free graph of Huapont Life SciencesLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Huapont Life SciencesLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.4% over the last five years. However it looks like Huapont Life SciencesLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Huapont Life SciencesLtd's ROCE

In summary, Huapont Life SciencesLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 15% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Huapont Life SciencesLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Huapont Life SciencesLtd 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.