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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at New Trend International Logis-TechLtd's (SZSE:300532) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on New Trend International Logis-TechLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥416m ÷ (CN¥5.1b - CN¥3.4b) (Based on the trailing twelve months to December 2023).
Therefore, New Trend International Logis-TechLtd has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Software industry average of 3.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for New Trend International Logis-TechLtd's ROCE against it's prior returns. If you'd like to look at how New Trend International Logis-TechLtd has performed in the past in other metrics, you can view this free graph of New Trend International Logis-TechLtd's past earnings, revenue and cash flow.
What Does the ROCE Trend For New Trend International Logis-TechLtd Tell Us?
We like the trends that we're seeing from New Trend International Logis-TechLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 118%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Key Takeaway
To sum it up, New Trend International Logis-TechLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 0.2% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, New Trend International Logis-TechLtd does come with some risks, and we've found 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.