There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Unionman Technology (SHSE:688609) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Unionman Technology:

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

0.14 = CN¥202m ÷ (CN¥3.2b - CN¥1.7b) (Based on the trailing twelve months to March 2022).

Therefore, Unionman Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Communications industry.

Check out our latest analysis for Unionman Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Unionman Technology's ROCE against it's prior returns. If you'd like to look at how Unionman Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Unionman Technology's ROCE Trending?

When we looked at the ROCE trend at Unionman Technology, we didn't gain much confidence. Around two years ago the returns on capital were 20%, but since then they've fallen to 14%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Unionman Technology has done well to pay down its current liabilities to 53% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 53% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Unionman Technology is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Unionman Technology does have some risks though, and we've spotted 4 warning signs for Unionman Technology that you might be interested in.

While Unionman 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.