If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Having said that, from a first glance at Ningbo Runhe High-Tech Materials (SZSE:300727) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Ningbo Runhe High-Tech Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = CN¥89m ÷ (CN¥1.6b - CN¥409m) (Based on the trailing twelve months to September 2023).
So, Ningbo Runhe High-Tech Materials has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.
View our latest analysis for Ningbo Runhe High-Tech Materials
Above you can see how the current ROCE for Ningbo Runhe High-Tech Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Runhe High-Tech Materials here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Ningbo Runhe High-Tech Materials, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Ningbo Runhe High-Tech Materials' ROCE
In summary, Ningbo Runhe High-Tech Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 32% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing to note, we've identified 1 warning sign with Ningbo Runhe High-Tech Materials and understanding this should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.