If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 investigating VT Industrial TechnologyLtd (SZSE:300707), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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 VT Industrial TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥51m ÷ (CN¥1.6b - CN¥335m) (Based on the trailing twelve months to September 2023).
So, VT Industrial TechnologyLtd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
See our latest analysis for VT Industrial TechnologyLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how VT Industrial TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From VT Industrial TechnologyLtd's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 85%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence VT Industrial TechnologyLtd might not have received a full period of earnings contribution from it.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by VT Industrial TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 5.7% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One final note, you should learn about the 3 warning signs we've spotted with VT Industrial TechnologyLtd (including 2 which are significant) .
While VT Industrial 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.