There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Long Young Electronic (Kunshan) (SZSE:301389) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Long Young Electronic (Kunshan) is:

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

0.022 = CN¥48m ÷ (CN¥2.3b - CN¥155m) (Based on the trailing twelve months to March 2024).

Thus, Long Young Electronic (Kunshan) has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

Above you can see how the current ROCE for Long Young Electronic (Kunshan) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Long Young Electronic (Kunshan) .

What Can We Tell From Long Young Electronic (Kunshan)'s ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 37% five years ago, while the business's capital employed increased by 700%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Long Young Electronic (Kunshan) might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, we're somewhat concerned by Long Young Electronic (Kunshan)'s diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Long Young Electronic (Kunshan) does have some risks though, and we've spotted 3 warning signs for Long Young Electronic (Kunshan) that you might be interested in.

While Long Young Electronic (Kunshan) 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.