If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Ocean's King Lighting Science & Technology (SZSE:002724) 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. The formula for this calculation on Ocean's King Lighting Science & Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = CN¥32m ÷ (CN¥3.9b - CN¥704m) (Based on the trailing twelve months to June 2023).
Thus, Ocean's King Lighting Science & Technology has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.
Check out our latest analysis for Ocean's King Lighting Science & Technology
In the above chart we have measured Ocean's King Lighting Science & Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Ocean's King Lighting Science & Technology's ROCE Trend?
When we looked at the ROCE trend at Ocean's King Lighting Science & Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.0% from 10% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From Ocean's King Lighting Science & Technology's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Ocean's King Lighting Science & Technology have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 101%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we've found 3 warning signs for Ocean's King Lighting Science & Technology that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.