There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Toyou Feiji Electronics (SZSE:300302), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Toyou Feiji Electronics is:

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

0.014 = CN¥22m ÷ (CN¥1.9b - CN¥238m) (Based on the trailing twelve months to June 2023).

So, Toyou Feiji Electronics has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 3.3%.

Check out our latest analysis for Toyou Feiji Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Toyou Feiji Electronics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Toyou Feiji Electronics, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Toyou Feiji Electronics doesn't inspire confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Toyou Feiji Electronics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 86% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 2 warning signs for Toyou Feiji Electronics you'll probably want to 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.