Guangzhou Haozhi IndustrialLtd (SZSE:300503) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Guangzhou Haozhi IndustrialLtd (SZSE:300503) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guangzhou Haozhi IndustrialLtd, this is the formula:

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

0.043 = CN¥74m ÷ (CN¥2.7b - CN¥910m) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Haozhi IndustrialLtd has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

View our latest analysis for Guangzhou Haozhi IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Haozhi IndustrialLtd's ROCE against it's prior returns. If you'd like to look at how Guangzhou Haozhi IndustrialLtd has performed in the past in other metrics, you can view this free graph of Guangzhou Haozhi IndustrialLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.3%. The amount of capital employed has increased too, by 33%. So we're very much inspired by what we're seeing at Guangzhou Haozhi IndustrialLtd thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 34% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To sum it up, Guangzhou Haozhi IndustrialLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 113% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Guangzhou Haozhi IndustrialLtd we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.