Returns On Capital At Hebei Gongda Keya Energy TechnologyLtd (SZSE:301197) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Hebei Gongda Keya Energy TechnologyLtd (SZSE:301197) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hebei Gongda Keya Energy TechnologyLtd, this is the formula:

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

0.012 = CN¥16m ÷ (CN¥1.7b - CN¥334m) (Based on the trailing twelve months to September 2024).

Therefore, Hebei Gongda Keya Energy TechnologyLtd has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.3%.

See our latest analysis for Hebei Gongda Keya Energy TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hebei Gongda Keya Energy TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hebei Gongda Keya Energy TechnologyLtd.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hebei Gongda Keya Energy TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 1.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Hebei Gongda Keya Energy TechnologyLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last year. 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 final note, you should learn about the 4 warning signs we've spotted with Hebei Gongda Keya Energy TechnologyLtd (including 2 which are significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.