There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Jiangsu New Energy Development (SHSE:603693) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Jiangsu New Energy Development is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = CN¥815m ÷ (CN¥16b - CN¥2.4b) (Based on the trailing twelve months to September 2023).
So, Jiangsu New Energy Development has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.
In the above chart we have measured Jiangsu New Energy Development's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu New Energy Development here for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Jiangsu New Energy Development. Over the past five years, ROCE has remained relatively flat at around 6.0% and the business has deployed 81% more capital into its operations. 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.
The Bottom Line
In conclusion, Jiangsu New Energy Development has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Jiangsu New Energy Development has the makings of a multi-bagger.
On a final note, we've found 2 warning signs for Jiangsu New Energy Development that we think you should be aware of.
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.