There are a few key trends to look for if we want to identify the next multi-bagger. 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 briefly looking over the numbers, we don't think Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 Ningbo Ronbay New Energy TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥769m ÷ (CN¥25b - CN¥9.0b) (Based on the trailing twelve months to December 2023).
Therefore, Ningbo Ronbay New Energy TechnologyLtd has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.
In the above chart we have measured Ningbo Ronbay New Energy TechnologyLtd'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 Ningbo Ronbay New Energy TechnologyLtd here for free.
How Are Returns Trending?
Unfortunately, the trend isn't great with ROCE falling from 8.1% five years ago, while capital employed has grown 456%. Usually this isn't ideal, but given Ningbo Ronbay New Energy TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Ningbo Ronbay New Energy TechnologyLtd's earnings and if they change as a result from the capital raise.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.9%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Key Takeaway
In summary, we're somewhat concerned by Ningbo Ronbay New Energy TechnologyLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 50% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Like most companies, Ningbo Ronbay New Energy TechnologyLtd does come with some risks, and we've found 3 warning signs that you should be aware of.
While Ningbo Ronbay New Energy 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.