If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. In light of that, when we looked at Huadi International Group (NASDAQ:HUDI) and its ROCE trend, we weren't exactly thrilled.

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 Huadi International Group:

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

0.023 = US$1.8m ÷ (US$93m - US$15m) (Based on the trailing twelve months to March 2024).

Thus, Huadi International Group has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 10%.

Check out our latest analysis for Huadi International Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Huadi International Group's past further, check out this free graph covering Huadi International Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Huadi International Group Tell Us?

In terms of Huadi International Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.3% from 43% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, Huadi International Group has done well to pay down its current liabilities to 16% of total assets. Considering it used to be 72%, that's a huge drop in that ratio and it would explain the decline in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Huadi International Group's ROCE

To conclude, we've found that Huadi International Group is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 92% in the last three years. Therefore based on the analysis done in this article, we don't think Huadi International Group has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Huadi International Group (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Huadi International Group 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.