If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Newonder Special ElectricLtd (SZSE:301120), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Newonder Special ElectricLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = CN¥70m ÷ (CN¥1.7b - CN¥70m) (Based on the trailing twelve months to September 2023).
Therefore, Newonder Special ElectricLtd has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.
View our latest analysis for Newonder Special ElectricLtd
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're interested in investigating Newonder Special ElectricLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Newonder Special ElectricLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.4% from 9.0% five years ago. 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.
On a related note, Newonder Special ElectricLtd has decreased its current liabilities to 4.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
To conclude, we've found that Newonder Special ElectricLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 39% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Newonder Special ElectricLtd has the makings of a multi-bagger.
While Newonder Special ElectricLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.