If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Jiangxi Xinyu Guoke Technology (SZSE:300722) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Jiangxi Xinyu Guoke Technology is:

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

0.12 = CN¥75m ÷ (CN¥787m - CN¥160m) (Based on the trailing twelve months to March 2024).

So, Jiangxi Xinyu Guoke Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 4.3% it's much better.

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

The Trend Of ROCE

We like the trends that we're seeing from Jiangxi Xinyu Guoke Technology. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 42% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Jiangxi Xinyu Guoke Technology'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 Jiangxi Xinyu Guoke Technology has. Since the stock has returned a staggering 105% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Jiangxi Xinyu Guoke Technology (of which 1 shouldn't be ignored!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com