What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Tongling Jingda Special Magnet Wire (SHSE:600577), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Tongling Jingda Special Magnet Wire:

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

0.10 = CN¥638m ÷ (CN¥11b - CN¥5.2b) (Based on the trailing twelve months to December 2023).

Thus, Tongling Jingda Special Magnet Wire has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.5% it's much better.

Above you can see how the current ROCE for Tongling Jingda Special Magnet Wire compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tongling Jingda Special Magnet Wire for free.

What Does the ROCE Trend For Tongling Jingda Special Magnet Wire Tell Us?

In terms of Tongling Jingda Special Magnet Wire's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 10%. 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 46%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Tongling Jingda Special Magnet Wire's ROCE

To conclude, we've found that Tongling Jingda Special Magnet Wire is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 23% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 1 warning sign for Tongling Jingda Special Magnet Wire you'll probably want to know about.

While Tongling Jingda Special Magnet Wire isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.