To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Jiangsu Cnano Technology (SHSE:688116), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Jiangsu Cnano Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = CN¥286m ÷ (CN¥4.7b - CN¥897m) (Based on the trailing twelve months to September 2023).
Therefore, Jiangsu Cnano Technology has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.6%.
In the above chart we have measured Jiangsu Cnano Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Cnano Technology here for free.
What Can We Tell From Jiangsu Cnano Technology's ROCE Trend?
There are better returns on capital out there than what we're seeing at Jiangsu Cnano Technology. Over the past five years, ROCE has remained relatively flat at around 7.5% and the business has deployed 511% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Jiangsu Cnano Technology's ROCE
In conclusion, Jiangsu Cnano Technology has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 65% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Jiangsu Cnano Technology has the makings of a multi-bagger.
Jiangsu Cnano Technology does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.
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.
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.