If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at the ROCE trend of Jiangsu Lopal Tech (SHSE:603906) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Jiangsu Lopal Tech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CN¥1.5b ÷ (CN¥12b - CN¥5.4b) (Based on the trailing twelve months to September 2022).
Thus, Jiangsu Lopal Tech has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 8.9%.
See our latest analysis for Jiangsu Lopal Tech
SHSE:603906 Return on Capital Employed November 8th 2022Above you can see how the current ROCE for Jiangsu Lopal Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We like the trends that we're seeing from Jiangsu Lopal Tech. The data shows that returns on capital have increased substantially over the last five years to 21%. The amount of capital employed has increased too, by 458%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 43% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Jiangsu Lopal Tech's ROCE
To sum it up, Jiangsu Lopal Tech has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Jiangsu Lopal Tech can keep these trends up, it could have a bright future ahead.
On a final note, we found 3 warning signs for Jiangsu Lopal Tech (1 is significant) you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.