If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Guangdong Create Century Intelligent Equipment Group's (SZSE:300083) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Guangdong Create Century Intelligent Equipment Group:

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

0.018 = CN¥108m ÷ (CN¥8.9b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Create Century Intelligent Equipment Group has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.2%.

Check out our latest analysis for Guangdong Create Century Intelligent Equipment Group

Above you can see how the current ROCE for Guangdong Create Century Intelligent Equipment Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

While there are companies with higher returns on capital out there, we still find the trend at Guangdong Create Century Intelligent Equipment Group promising. The figures show that over the last five years, ROCE has grown 62% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Guangdong Create Century Intelligent Equipment Group's ROCE

In summary, we're delighted to see that Guangdong Create Century Intelligent Equipment Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 140% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Guangdong Create Century Intelligent Equipment Group that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.