If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Jiangsu JieJie Microelectronics (SZSE:300623), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangsu JieJie Microelectronics, this is the formula:

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

0.029 = CN¥188m ÷ (CN¥7.8b - CN¥1.3b) (Based on the trailing twelve months to September 2023).

So, Jiangsu JieJie Microelectronics has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.2%.

See our latest analysis for Jiangsu JieJie Microelectronics

In the above chart we have measured Jiangsu JieJie Microelectronics' 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 report for Jiangsu JieJie Microelectronics.

What Does the ROCE Trend For Jiangsu JieJie Microelectronics Tell Us?

On the surface, the trend of ROCE at Jiangsu JieJie Microelectronics doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu JieJie Microelectronics is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 178% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 3 warning signs for Jiangsu JieJie Microelectronics that we think you should be aware of.

While Jiangsu JieJie Microelectronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.