To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Aoshikang Technology (SZSE:002913), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Aoshikang Technology is:

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

0.079 = CN¥401m ÷ (CN¥8.1b - CN¥3.0b) (Based on the trailing twelve months to September 2024).

Thus, Aoshikang Technology has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

In the above chart we have measured Aoshikang Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Aoshikang Technology for free.

The Trend Of ROCE

In terms of Aoshikang Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Aoshikang Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Aoshikang Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Aoshikang Technology could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002913 on our platform quite valuable.

While Aoshikang 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.