If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. That's why when we briefly looked at Motic (Xiamen) Electric GroupLtd's (SZSE:300341) ROCE trend, we were pretty happy with what we saw.

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. The formula for this calculation on Motic (Xiamen) Electric GroupLtd is:

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

0.15 = CN¥266m ÷ (CN¥2.3b - CN¥460m) (Based on the trailing twelve months to September 2023).

Therefore, Motic (Xiamen) Electric GroupLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.5% it's much better.

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 Motic (Xiamen) Electric GroupLtd's past further, check out this free graph covering Motic (Xiamen) Electric GroupLtd's past earnings, revenue and cash flow.

What Can We Tell From Motic (Xiamen) Electric GroupLtd's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 66% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

To sum it up, Motic (Xiamen) Electric GroupLtd has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 48% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Motic (Xiamen) Electric GroupLtd does have some risks though, and we've spotted 1 warning sign for Motic (Xiamen) Electric GroupLtd that you might be interested in.

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.