There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hebei Yichen Industrial Group (HKG:1596), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Hebei Yichen Industrial Group:

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

0.033 = CN¥89m ÷ (CN¥3.6b - CN¥919m) (Based on the trailing twelve months to December 2022).

Thus, Hebei Yichen Industrial Group has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.9%.

See our latest analysis for Hebei Yichen Industrial Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hebei Yichen Industrial Group, check out these free graphs here.

What Can We Tell From Hebei Yichen Industrial Group's ROCE Trend?

On the surface, the trend of ROCE at Hebei Yichen Industrial Group doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 3.3%. However it looks like Hebei Yichen Industrial Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Hebei Yichen Industrial Group's ROCE

Bringing it all together, while we're somewhat encouraged by Hebei Yichen Industrial Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Hebei Yichen Industrial Group that you might find interesting.

While Hebei Yichen Industrial Group 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.