If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Guangdong KinLong Hardware ProductsLtd (SZSE:002791) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guangdong KinLong Hardware ProductsLtd:

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

0.052 = CN¥296m ÷ (CN¥10b - CN¥4.4b) (Based on the trailing twelve months to September 2023).

So, Guangdong KinLong Hardware ProductsLtd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 6.4% average generated by the Building industry.

Check out our latest analysis for Guangdong KinLong Hardware ProductsLtd

In the above chart we have measured Guangdong KinLong Hardware ProductsLtd'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 Guangdong KinLong Hardware ProductsLtd.

What Does the ROCE Trend For Guangdong KinLong Hardware ProductsLtd Tell Us?

There are better returns on capital out there than what we're seeing at Guangdong KinLong Hardware ProductsLtd. Over the past five years, ROCE has remained relatively flat at around 5.2% and the business has deployed 104% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 43% of total assets, this reported ROCE would probably be less than5.2% because total capital employed would be higher.The 5.2% ROCE could be even lower if current liabilities weren't 43% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Guangdong KinLong Hardware ProductsLtd's ROCE

In conclusion, Guangdong KinLong Hardware ProductsLtd has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 362% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Guangdong KinLong Hardware ProductsLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Guangdong KinLong Hardware ProductsLtd 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.