If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Guangzhou Kingmed Diagnostics Group (SHSE:603882) we really liked what we saw.

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 Guangzhou Kingmed Diagnostics Group:

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

0.40 = CN¥3.1b ÷ (CN¥13b - CN¥4.7b) (Based on the trailing twelve months to March 2022).

Thus, Guangzhou Kingmed Diagnostics Group has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Guangzhou Kingmed Diagnostics Group

Above you can see how the current ROCE for Guangzhou Kingmed Diagnostics Group 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 Guangzhou Kingmed Diagnostics Group here for free.

The Trend Of ROCE

We like the trends that we're seeing from Guangzhou Kingmed Diagnostics Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. Basically the business is earning more per dollar of capital invested and in addition to that, 322% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Guangzhou Kingmed Diagnostics Group's ROCE

All in all, it's terrific to see that Guangzhou Kingmed Diagnostics Group is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Guangzhou Kingmed Diagnostics Group can keep these trends up, it could have a bright future ahead.

Guangzhou Kingmed Diagnostics Group does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.