If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Wetouch Technology (NASDAQ:WETH), it didn't seem to tick all of these boxes.

Understanding 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 Wetouch Technology is:

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

0.058 = US$7.5m ÷ (US$133m - US$3.5m) (Based on the trailing twelve months to September 2024).

Therefore, Wetouch Technology has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

Check out our latest analysis for Wetouch Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wetouch Technology'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 Wetouch Technology.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Wetouch Technology's ROCE has reduced by 90% over the last five years, while the business employed 345% more capital. That being said, Wetouch Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Wetouch Technology might not have received a full period of earnings contribution from it.

On a side note, Wetouch Technology has done well to pay down its current liabilities to 2.6% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Wetouch Technology's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 92% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Wetouch Technology has the makings of a multi-bagger.

If you'd like to know more about Wetouch Technology, we've spotted 5 warning signs, and 1 of them is significant.

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.