If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Jiangxi Huawu BrakeLtd (SZSE:300095) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jiangxi Huawu BrakeLtd is:

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

0.0077 = CN¥22m ÷ (CN¥3.6b - CN¥780m) (Based on the trailing twelve months to September 2024).

Thus, Jiangxi Huawu BrakeLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangxi Huawu BrakeLtd's ROCE against it's prior returns. If you'd like to look at how Jiangxi Huawu BrakeLtd has performed in the past in other metrics, you can view this free graph of Jiangxi Huawu BrakeLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangxi Huawu BrakeLtd Tell Us?

The fact that Jiangxi Huawu BrakeLtd 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 0.8% which is a sight for sore eyes. Not only that, but the company is utilizing 85% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Jiangxi Huawu BrakeLtd has decreased current liabilities to 22% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Jiangxi Huawu BrakeLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

In summary, it's great to see that Jiangxi Huawu BrakeLtd has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 4.7% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 3 warning signs facing Jiangxi Huawu BrakeLtd that you might find interesting.

While Jiangxi Huawu BrakeLtd 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.