What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nanjing Sunlord Electronics (SZSE:300975) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Nanjing Sunlord Electronics, this is the formula:

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

0.048 = CN¥105m ÷ (CN¥4.1b - CN¥1.9b) (Based on the trailing twelve months to March 2024).

Therefore, Nanjing Sunlord Electronics has an ROCE of 4.8%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Sunlord Electronics' ROCE against it's prior returns. If you're interested in investigating Nanjing Sunlord Electronics' past further, check out this free graph covering Nanjing Sunlord Electronics' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Nanjing Sunlord Electronics, we didn't gain much confidence. Around five years ago the returns on capital were 42%, but since then they've fallen to 4.8%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.8%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Nanjing Sunlord Electronics' ROCE

To conclude, we've found that Nanjing Sunlord Electronics is reinvesting in the business, but returns have been falling. Since the stock has declined 17% 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 Nanjing Sunlord Electronics has the makings of a multi-bagger.

One final note, you should learn about the 5 warning signs we've spotted with Nanjing Sunlord Electronics (including 2 which are a bit concerning) .

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.