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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Ningbo TechmationLtd (SHSE:603015) and its ROCE trend, we weren't exactly thrilled.
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 Ningbo TechmationLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = CN¥64m ÷ (CN¥2.0b - CN¥345m) (Based on the trailing twelve months to September 2022).
So, Ningbo TechmationLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 6.9%.
View our latest analysis for Ningbo TechmationLtd
SHSE:603015 Return on Capital Employed December 22nd 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo TechmationLtd's ROCE against it's prior returns. If you're interested in investigating Ningbo TechmationLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Ningbo TechmationLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.3% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Ningbo TechmationLtd's ROCE
In summary, we're somewhat concerned by Ningbo TechmationLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing, we've spotted 2 warning signs facing Ningbo TechmationLtd that you might find interesting.
While Ningbo TechmationLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.