What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Qingdao Hi-Tech Moulds & Plastics Technology (SZSE:301022) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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 Qingdao Hi-Tech Moulds & Plastics Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = CN¥42m ÷ (CN¥1.8b - CN¥509m) (Based on the trailing twelve months to September 2023).
Thus, Qingdao Hi-Tech Moulds & Plastics Technology has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Hi-Tech Moulds & Plastics Technology's ROCE against it's prior returns. If you'd like to look at how Qingdao Hi-Tech Moulds & Plastics Technology 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 Qingdao Hi-Tech Moulds & Plastics Technology's ROCE Trend?
When we looked at the ROCE trend at Qingdao Hi-Tech Moulds & Plastics Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Qingdao Hi-Tech Moulds & Plastics Technology has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Qingdao Hi-Tech Moulds & Plastics Technology's ROCE
Bringing it all together, while we're somewhat encouraged by Qingdao Hi-Tech Moulds & Plastics Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you'd like to know more about Qingdao Hi-Tech Moulds & Plastics Technology, we've spotted 3 warning signs, and 1 of them is potentially serious.
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.