If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Nantong Xingqiu GraphiteLtd (SHSE:688633) 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)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)
0.10 = CN¥148m ÷ (CN¥2.2b - CN¥742m) (Based on the trailing twelve months to June 2023).
Therefore, Nantong Xingqiu GraphiteLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Machinery industry.
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 want to delve into the historical earnings, revenue and cash flow of Nantong Xingqiu GraphiteLtd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
In terms of Nantong Xingqiu GraphiteLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 29% over the last three years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Nantong Xingqiu GraphiteLtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nantong Xingqiu GraphiteLtd. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you'd like to know more about Nantong Xingqiu GraphiteLtd, we've spotted 3 warning signs, and 2 of them don't sit too well with us.
While Nantong Xingqiu GraphiteLtd 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.