To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Quectel Wireless Solutions (SHSE:603236) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for Quectel Wireless Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥116m ÷ (CN¥11b - CN¥5.2b) (Based on the trailing twelve months to September 2023).
Thus, Quectel Wireless Solutions has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.3%.
In the above chart we have measured Quectel Wireless Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Quectel Wireless Solutions .
What The Trend Of ROCE Can Tell Us
In terms of Quectel Wireless Solutions' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.1% from 22% five years ago. 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.
Another thing to note, Quectel Wireless Solutions has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Quectel Wireless Solutions' ROCE
Bringing it all together, while we're somewhat encouraged by Quectel Wireless Solutions' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 46% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Quectel Wireless Solutions has the makings of a multi-bagger.
If you want to continue researching Quectel Wireless Solutions, you might be interested to know about the 3 warning signs that our analysis has discovered.
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.