To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Shanghai Huace Navigation Technology (SZSE:300627) 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 Shanghai Huace Navigation Technology is:

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

0.093 = CN¥228m ÷ (CN¥3.3b - CN¥837m) (Based on the trailing twelve months to March 2022).

Therefore, Shanghai Huace Navigation Technology has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 5.9% generated by the Communications industry, it's much better.

See our latest analysis for Shanghai Huace Navigation Technology

In the above chart we have measured Shanghai Huace Navigation Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Huace Navigation Technology.

What Can We Tell From Shanghai Huace Navigation Technology's ROCE Trend?

The returns on capital haven't changed much for Shanghai Huace Navigation Technology in recent years. Over the past five years, ROCE has remained relatively flat at around 9.3% and the business has deployed 256% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Shanghai Huace Navigation Technology's ROCE

Long story short, while Shanghai Huace Navigation Technology has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 198% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Shanghai Huace Navigation Technology, we've spotted 2 warning signs, and 1 of them is concerning.

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.