What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Motic (Xiamen) Electric GroupLtd's (SZSE:300341) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Motic (Xiamen) Electric GroupLtd:

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

0.20 = CN¥349m ÷ (CN¥2.2b - CN¥473m) (Based on the trailing twelve months to March 2023).

So, Motic (Xiamen) Electric GroupLtd has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Electrical industry average of 6.6%.

See our latest analysis for Motic (Xiamen) Electric GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Motic (Xiamen) Electric GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Motic (Xiamen) Electric GroupLtd, check out these free graphs here.

What Does the ROCE Trend For Motic (Xiamen) Electric GroupLtd Tell Us?

Investors would be pleased with what's happening at Motic (Xiamen) Electric GroupLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. 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.

In Conclusion...

To sum it up, Motic (Xiamen) Electric GroupLtd 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 Motic (Xiamen) Electric GroupLtd can keep these trends up, it could have a bright future ahead.

Motic (Xiamen) Electric GroupLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

Motic (Xiamen) Electric GroupLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.