There are a few key trends to look for if we want to identify the next multi-bagger. 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 Jiangsu Allfavor Intelligent Circuits TechnologyLtd (SZSE:300964) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Jiangsu Allfavor Intelligent Circuits TechnologyLtd, this is the formula:

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

0.0089 = CN¥9.2m ÷ (CN¥1.3b - CN¥293m) (Based on the trailing twelve months to June 2023).

So, Jiangsu Allfavor Intelligent Circuits TechnologyLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.3%.

See our latest analysis for Jiangsu Allfavor Intelligent Circuits TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Allfavor Intelligent Circuits TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Jiangsu Allfavor Intelligent Circuits TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Jiangsu Allfavor Intelligent Circuits TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 0.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

In Conclusion...

In summary, Jiangsu Allfavor Intelligent Circuits TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 51% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Jiangsu Allfavor Intelligent Circuits TechnologyLtd (2 can't be ignored) you should be aware of.

While Jiangsu Allfavor Intelligent Circuits TechnologyLtd 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.