Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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 Nantong Xingqiu GraphiteLtd is:

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

0.098 = CN¥124m ÷ (CN¥1.8b - CN¥518m) (Based on the trailing twelve months to June 2022).

Thus, Nantong Xingqiu GraphiteLtd has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.9%.

View our latest analysis for Nantong Xingqiu GraphiteLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nantong Xingqiu GraphiteLtd's ROCE against it's prior returns. If you're interested in investigating Nantong Xingqiu GraphiteLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Nantong Xingqiu GraphiteLtd's ROCE Trending?

In terms of Nantong Xingqiu GraphiteLtd's historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 29%, but since then they've fallen to 9.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Nantong Xingqiu GraphiteLtd's ROCE

In summary, Nantong Xingqiu GraphiteLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 25% 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 Nantong Xingqiu GraphiteLtd has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Nantong Xingqiu GraphiteLtd and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.