If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jiangxi Selon Industrial (SZSE:002748), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Jiangxi Selon Industrial, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = CN¥70m ÷ (CN¥2.0b - CN¥536m) (Based on the trailing twelve months to September 2023).
So, Jiangxi Selon Industrial has an ROCE of 4.7%. On its own, that's a low figure but it's around the 5.9% average generated by the Chemicals industry.
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangxi Selon Industrial.
What Can We Tell From Jiangxi Selon Industrial's ROCE Trend?
The returns on capital haven't changed much for Jiangxi Selon Industrial in recent years. The company has consistently earned 4.7% for the last five years, and the capital employed within the business has risen 26% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Jiangxi Selon Industrial's ROCE
Long story short, while Jiangxi Selon Industrial has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last five years. Therefore based on the analysis done in this article, we don't think Jiangxi Selon Industrial has the makings of a multi-bagger.
On a final note, we've found 2 warning signs for Jiangxi Selon Industrial that we think you should be aware of.
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.
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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.