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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nantong Xingqiu GraphiteLtd (SHSE:688633) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Nantong Xingqiu GraphiteLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = CN¥180m ÷ (CN¥2.9b - CN¥705m) (Based on the trailing twelve months to March 2024).
Therefore, Nantong Xingqiu GraphiteLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.3%.
In the above chart we have measured Nantong Xingqiu GraphiteLtd'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 Nantong Xingqiu GraphiteLtd for free.
The Trend Of ROCE
When we looked at the ROCE trend at Nantong Xingqiu GraphiteLtd, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 8.4% from 29% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Nantong Xingqiu GraphiteLtd has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Nantong Xingqiu GraphiteLtd's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Nantong Xingqiu GraphiteLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 27% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you want to continue researching Nantong Xingqiu GraphiteLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.