To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Greentown Management Holdings (HKG:9979) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Greentown Management Holdings, this is the formula:

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

0.16 = CN¥557m ÷ (CN¥5.2b - CN¥1.8b) (Based on the trailing twelve months to December 2021).

Therefore, Greentown Management Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Construction industry.

View our latest analysis for Greentown Management Holdings

Above you can see how the current ROCE for Greentown Management Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Greentown Management Holdings.

So How Is Greentown Management Holdings' ROCE Trending?

When we looked at the ROCE trend at Greentown Management Holdings, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 16% from 58% four years ago. 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, Greentown Management Holdings has done well to pay down its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Greentown Management Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Greentown Management Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 23% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 2 warning signs for Greentown Management Holdings you'll probably want to know about.

While Greentown Management Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.