If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Guangdong Transtek Medical Electronics (SZSE:300562) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Guangdong Transtek Medical Electronics:

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

0.06 = CN¥64m ÷ (CN¥1.6b - CN¥496m) (Based on the trailing twelve months to September 2024).

So, Guangdong Transtek Medical Electronics has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

Above you can see how the current ROCE for Guangdong Transtek Medical Electronics 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 Guangdong Transtek Medical Electronics .

What Can We Tell From Guangdong Transtek Medical Electronics' ROCE Trend?

In terms of Guangdong Transtek Medical Electronics' historical ROCE trend, it doesn't exactly demand attention. The company has employed 91% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Guangdong Transtek Medical Electronics' ROCE

As we've seen above, Guangdong Transtek Medical Electronics' returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 21% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Transtek Medical Electronics has the makings of a multi-bagger.

If you'd like to know about the risks facing Guangdong Transtek Medical Electronics, we've discovered 2 warning signs that you should be aware of.

While Guangdong Transtek Medical Electronics 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.