To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Cubic Sensor and InstrumentLtd (SHSE:688665), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Cubic Sensor and InstrumentLtd, this is the formula:

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

0.079 = CN¥86m ÷ (CN¥1.4b - CN¥325m) (Based on the trailing twelve months to September 2024).

Therefore, Cubic Sensor and InstrumentLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

In the above chart we have measured Cubic Sensor and InstrumentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Cubic Sensor and InstrumentLtd for free.

What Can We Tell From Cubic Sensor and InstrumentLtd's ROCE Trend?

On the surface, the trend of ROCE at Cubic Sensor and InstrumentLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.9% from 33% five years ago. 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.

The Bottom Line

While returns have fallen for Cubic Sensor and InstrumentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 70% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One final note, you should learn about the 3 warning signs we've spotted with Cubic Sensor and InstrumentLtd (including 1 which shouldn't be ignored) .

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.