What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 briefly looking over the numbers, we don't think Haibo Heavy Engineering Science and Technology (SZSE:300517) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on Haibo Heavy Engineering Science and Technology is:

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

0.014 = CN¥17m ÷ (CN¥1.6b - CN¥427m) (Based on the trailing twelve months to September 2023).

Thus, Haibo Heavy Engineering Science and Technology has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.8%.

Check out our latest analysis for Haibo Heavy Engineering Science and Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Haibo Heavy Engineering Science and Technology's ROCE against it's prior returns. If you're interested in investigating Haibo Heavy Engineering Science and Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Haibo Heavy Engineering Science and Technology Tell Us?

On the surface, the trend of ROCE at Haibo Heavy Engineering Science and Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 6.3% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Haibo Heavy Engineering Science and Technology has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Haibo Heavy Engineering Science and Technology's ROCE

We're a bit apprehensive about Haibo Heavy Engineering Science and Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 56% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Haibo Heavy Engineering Science and Technology you'll probably want to know about.

While Haibo Heavy Engineering Science and Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.