There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at HuafangLtd (SHSE:600448), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for HuafangLtd:

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

0.042 = CN¥81m ÷ (CN¥3.9b - CN¥2.0b) (Based on the trailing twelve months to September 2021).

So, HuafangLtd has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.8%.

View our latest analysis for HuafangLtd

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

What Does the ROCE Trend For HuafangLtd Tell Us?

In terms of HuafangLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.2% for the last five years, and the capital employed within the business has risen 89% in that time. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 51% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 51%, some of that risk is still prevalent.

In Conclusion...

In conclusion, HuafangLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 31% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think HuafangLtd has the makings of a multi-bagger.

One final note, you should learn about the 5 warning signs we've spotted with HuafangLtd (including 2 which make us uncomfortable) .

While HuafangLtd 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.