What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think NanJing AoLian AE&EALtd (SZSE:300585) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for NanJing AoLian AE&EALtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CN¥21m ÷ (CN¥899m - CN¥180m) (Based on the trailing twelve months to March 2022).
Thus, NanJing AoLian AE&EALtd has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
View our latest analysis for NanJing AoLian AE&EALtd
SZSE:300585 Return on Capital Employed June 17th 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for NanJing AoLian AE&EALtd's ROCE against it's prior returns. If you're interested in investigating NanJing AoLian AE&EALtd's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because NanJing AoLian AE&EALtd's ROCE has reduced by 77% over the last five years, while the business employed 56% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with NanJing AoLian AE&EALtd's earnings and if they change as a result from the capital raise.
What We Can Learn From NanJing AoLian AE&EALtd's ROCE
In summary, NanJing AoLian AE&EALtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know more about NanJing AoLian AE&EALtd, we've spotted 5 warning signs, and 1 of them is concerning.
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.