If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Sichuan Huiyuan Optical Communication (SZSE:000586) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Sichuan Huiyuan Optical Communication:

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

0.063 = CN¥21m ÷ (CN¥553m - CN¥217m) (Based on the trailing twelve months to March 2023).

Therefore, Sichuan Huiyuan Optical Communication has an ROCE of 6.3%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

See our latest analysis for Sichuan Huiyuan Optical Communication

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sichuan Huiyuan Optical Communication, check out these free graphs here.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. So we're very much inspired by what we're seeing at Sichuan Huiyuan Optical Communication thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sichuan Huiyuan Optical Communication has. And since the stock has fallen 11% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 3 warning signs with Sichuan Huiyuan Optical Communication and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.