If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Hunan Gold (SZSE:002155) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Hunan Gold is:

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

0.093 = CN¥605m ÷ (CN¥7.6b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

So, Hunan Gold has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.6% generated by the Metals and Mining industry, it's much better.

In the above chart we have measured Hunan Gold'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 Hunan Gold for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Hunan Gold. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 9.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 14% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Hunan Gold's ROCE

In summary, Hunan Gold has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 73% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Hunan Gold does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hunan Gold 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.