There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Raytron TechnologyLtd (SHSE:688002) 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)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Raytron TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥332m ÷ (CN¥8.3b - CN¥1.8b) (Based on the trailing twelve months to June 2023).
Thus, Raytron TechnologyLtd has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.
See our latest analysis for Raytron TechnologyLtd
In the above chart we have measured Raytron TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Raytron TechnologyLtd here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Raytron TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.1% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Raytron TechnologyLtd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 51% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Raytron TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Raytron TechnologyLtd that you might be interested in.
While Raytron TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.