If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 investigating Ningbo Tianlong Electronics (SHSE:603266), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Ningbo Tianlong Electronics, this is the formula:

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

0.071 = CN¥108m ÷ (CN¥2.0b - CN¥439m) (Based on the trailing twelve months to September 2023).

So, Ningbo Tianlong Electronics has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.9% generated by the Chemicals industry, it's much better.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ningbo Tianlong Electronics has performed in the past in other metrics, you can view this free graph of Ningbo Tianlong Electronics' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Ningbo Tianlong Electronics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.1% from 9.0% five years ago. However it looks like Ningbo Tianlong Electronics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Ningbo Tianlong Electronics' ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Tianlong Electronics' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 88% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Ningbo Tianlong Electronics does come with some risks, and we've found 1 warning sign that 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.