If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Traffic Control Technology (SHSE:688015) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Traffic Control Technology:

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

0.028 = CN¥79m ÷ (CN¥5.7b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

Therefore, Traffic Control Technology has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

In the above chart we have measured Traffic Control Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Traffic Control Technology .

The Trend Of ROCE

In terms of Traffic Control Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Traffic Control Technology has done well to pay down its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 50% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Traffic Control Technology's ROCE

To conclude, we've found that Traffic Control Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. Therefore based on the analysis done in this article, we don't think Traffic Control Technology has the makings of a multi-bagger.

One more thing, we've spotted 3 warning signs facing Traffic Control Technology that you might find interesting.

While Traffic Control Technology 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.