What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Goldwind Science&Technology (SZSE:002202) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Goldwind Science&Technology is:

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

0.029 = CN¥2.5b ÷ (CN¥156b - CN¥70b) (Based on the trailing twelve months to September 2024).

Therefore, Goldwind Science&Technology has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

Above you can see how the current ROCE for Goldwind Science&Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Goldwind Science&Technology for free.

How Are Returns Trending?

The returns on capital haven't changed much for Goldwind Science&Technology in recent years. The company has consistently earned 2.9% for the last five years, and the capital employed within the business has risen 46% in that time. 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.

Another thing to note, Goldwind Science&Technology has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In conclusion, Goldwind Science&Technology has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Goldwind Science&Technology has the makings of a multi-bagger.

If you want to know some of the risks facing Goldwind Science&Technology we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Goldwind Science&Technology 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.