What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Kunshan TopA Intelligent EquipmentLtd (SZSE:300836), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kunshan TopA Intelligent EquipmentLtd:

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

0.008 = CN¥4.6m ÷ (CN¥934m - CN¥364m) (Based on the trailing twelve months to March 2024).

Therefore, Kunshan TopA Intelligent EquipmentLtd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

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

The Trend Of ROCE

When we looked at the ROCE trend at Kunshan TopA Intelligent EquipmentLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Kunshan TopA Intelligent EquipmentLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kunshan TopA Intelligent EquipmentLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 42% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 2 warning signs facing Kunshan TopA Intelligent EquipmentLtd that you might find interesting.

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