There are a few key trends to look for if we want to identify the next multi-bagger. 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. So when we looked at Nanjing Julong Science & TechnologyLTD (SZSE:300644) and its trend of ROCE, we really liked what we saw.
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 Nanjing Julong Science & TechnologyLTD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥130m ÷ (CN¥2.0b - CN¥910m) (Based on the trailing twelve months to March 2024).
Therefore, Nanjing Julong Science & TechnologyLTD has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.7% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Julong Science & TechnologyLTD's ROCE against it's prior returns. If you're interested in investigating Nanjing Julong Science & TechnologyLTD's past further, check out this free graph covering Nanjing Julong Science & TechnologyLTD's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Nanjing Julong Science & TechnologyLTD. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 59% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Nanjing Julong Science & TechnologyLTD's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Nanjing Julong Science & TechnologyLTD has. Considering the stock has delivered 35% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
If you want to know some of the risks facing Nanjing Julong Science & TechnologyLTD we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
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.