If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 MeiG Smart Technology (SZSE:002881) 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)

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 MeiG Smart Technology is:

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

0.074 = CN¥115m ÷ (CN¥2.3b - CN¥783m) (Based on the trailing twelve months to September 2024).

So, MeiG Smart Technology has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 4.1% generated by the Communications industry, it's much better.

Above you can see how the current ROCE for MeiG Smart Technology 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 MeiG Smart Technology .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for MeiG Smart Technology in recent years. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 186% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while MeiG Smart Technology has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you're still interested in MeiG Smart Technology it's worth checking out our FREE intrinsic value approximation for 002881 to see if it's trading at an attractive price in other respects.

While MeiG Smart 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.