To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Jiangsu Guomao Reducer (SHSE:603915), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Jiangsu Guomao Reducer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥366m ÷ (CN¥4.8b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Therefore, Jiangsu Guomao Reducer has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.0% it's much better.
In the above chart we have measured Jiangsu Guomao Reducer'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 Guomao Reducer for free.
What Does the ROCE Trend For Jiangsu Guomao Reducer Tell Us?
On the surface, the trend of ROCE at Jiangsu Guomao Reducer doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 10%. 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, Jiangsu Guomao Reducer has decreased its current liabilities to 26% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Jiangsu Guomao Reducer's ROCE
To conclude, we've found that Jiangsu Guomao Reducer is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last three years. Therefore based on the analysis done in this article, we don't think Jiangsu Guomao Reducer has the makings of a multi-bagger.
On a final note, we've found 1 warning sign for Jiangsu Guomao Reducer that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.