There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Keli Sensing Technology (Ningbo)Ltd:

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

0.075 = CN¥196m ÷ (CN¥3.9b - CN¥1.3b) (Based on the trailing twelve months to June 2023).

Thus, Keli Sensing Technology (Ningbo)Ltd has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.3%.

View our latest analysis for Keli Sensing Technology (Ningbo)Ltd

In the above chart we have measured Keli Sensing Technology (Ningbo)Ltd'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 report on analyst forecasts for the company.

What Can We Tell From Keli Sensing Technology (Ningbo)Ltd's ROCE Trend?

When we looked at the ROCE trend at Keli Sensing Technology (Ningbo)Ltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.5% from 11% five years ago. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Keli Sensing Technology (Ningbo)Ltd's ROCE

To conclude, we've found that Keli Sensing Technology (Ningbo)Ltd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 89% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Keli Sensing Technology (Ningbo)Ltd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.