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. So on that note, Haibo Heavy Engineering Science and Technology (SZSE:300517) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Haibo Heavy Engineering Science and Technology:

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

0.10 = CN¥116m ÷ (CN¥1.9b - CN¥757m) (Based on the trailing twelve months to December 2021).

Therefore, Haibo Heavy Engineering Science and Technology has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.5% generated by the Construction industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Haibo Heavy Engineering Science and Technology, check out these free graphs here.

So How Is Haibo Heavy Engineering Science and Technology's ROCE Trending?

We like the trends that we're seeing from Haibo Heavy Engineering Science and Technology. The data shows that returns on capital have increased substantially over the last five years to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 90%. So we're very much inspired by what we're seeing at Haibo Heavy Engineering Science and Technology thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, Haibo Heavy Engineering Science and Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 1 warning sign for Haibo Heavy Engineering Science and Technology you'll probably want to know about.

While Haibo Heavy Engineering Science and Technology 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.