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. With that in mind, we've noticed some promising trends at Jiangsu Yunyi ElectricLtd (SZSE:300304) so let's look a bit deeper.
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. To calculate this metric for Jiangsu Yunyi ElectricLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = CN¥222m ÷ (CN¥3.6b - CN¥663m) (Based on the trailing twelve months to September 2023).
So, Jiangsu Yunyi ElectricLtd has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 6.0%.
See our latest analysis for Jiangsu Yunyi ElectricLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Yunyi ElectricLtd's ROCE against it's prior returns. If you'd like to look at how Jiangsu Yunyi ElectricLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.6%. The amount of capital employed has increased too, by 51%. 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.
Our Take On Jiangsu Yunyi ElectricLtd's ROCE
All in all, it's terrific to see that Jiangsu Yunyi ElectricLtd is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 76% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to know some of the risks facing Jiangsu Yunyi ElectricLtd we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.