To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Jiangsu Tongguang Electronic Wire & Cable (SZSE:300265) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Jiangsu Tongguang Electronic Wire & Cable:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.046 = CN¥109m ÷ (CN¥3.2b - CN¥813m) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Tongguang Electronic Wire & Cable has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Tongguang Electronic Wire & Cable's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Tongguang Electronic Wire & Cable.

What Can We Tell From Jiangsu Tongguang Electronic Wire & Cable's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.6%. The amount of capital employed has increased too, by 116%. So we're very much inspired by what we're seeing at Jiangsu Tongguang Electronic Wire & Cable thanks to its ability to profitably reinvest capital.

One more thing to note, Jiangsu Tongguang Electronic Wire & Cable has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

All in all, it's terrific to see that Jiangsu Tongguang Electronic Wire & Cable is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 30% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 2 warning signs facing Jiangsu Tongguang Electronic Wire & Cable that you might find interesting.

While Jiangsu Tongguang Electronic Wire & Cable 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.