If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. 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 Shijiazhuang Tonhe Electronics TechnologiesLtd's (SZSE:300491) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Shijiazhuang Tonhe Electronics TechnologiesLtd:

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

0.044 = CN¥53m ÷ (CN¥2.0b - CN¥792m) (Based on the trailing twelve months to September 2024).

Thus, Shijiazhuang Tonhe Electronics TechnologiesLtd has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

Above you can see how the current ROCE for Shijiazhuang Tonhe Electronics TechnologiesLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shijiazhuang Tonhe Electronics TechnologiesLtd .

What Does the ROCE Trend For Shijiazhuang Tonhe Electronics TechnologiesLtd Tell Us?

The fact that Shijiazhuang Tonhe Electronics TechnologiesLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.4% which is a sight for sore eyes. In addition to that, Shijiazhuang Tonhe Electronics TechnologiesLtd is employing 75% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Shijiazhuang Tonhe Electronics TechnologiesLtd's ROCE

Long story short, we're delighted to see that Shijiazhuang Tonhe Electronics TechnologiesLtd's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 23% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know about the risks facing Shijiazhuang Tonhe Electronics TechnologiesLtd, we've discovered 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.