If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Jiangsu Lidao New Materials (SHSE:603937), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 Jiangsu Lidao New Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥69m ÷ (CN¥2.1b - CN¥465m) (Based on the trailing twelve months to September 2023).
So, Jiangsu Lidao New Materials has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining 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 Lidao New Materials' 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 Lidao New Materials.
What Can We Tell From Jiangsu Lidao New Materials' ROCE Trend?
On the surface, the trend of ROCE at Jiangsu Lidao New Materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 9.7% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Jiangsu Lidao New Materials' ROCE
Bringing it all together, while we're somewhat encouraged by Jiangsu Lidao New Materials' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with Jiangsu Lidao New Materials (including 2 which make us uncomfortable) .
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.