What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Jiangsu Leadmicro Nano-Equipment Technology (SHSE:688147) and its trend of ROCE, we really liked what we saw.

What Is 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 Jiangsu Leadmicro Nano-Equipment Technology:

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

0.08 = CN¥211m ÷ (CN¥8.5b - CN¥5.9b) (Based on the trailing twelve months to March 2024).

So, Jiangsu Leadmicro Nano-Equipment Technology has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 3.9%.

Above you can see how the current ROCE for Jiangsu Leadmicro Nano-Equipment Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Leadmicro Nano-Equipment Technology .

What Can We Tell From Jiangsu Leadmicro Nano-Equipment Technology's ROCE Trend?

The fact that Jiangsu Leadmicro Nano-Equipment Technology is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.0% on its capital. In addition to that, Jiangsu Leadmicro Nano-Equipment Technology is employing 3,514% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Jiangsu Leadmicro Nano-Equipment Technology has decreased current liabilities to 69% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Jiangsu Leadmicro Nano-Equipment Technology's ROCE

Long story short, we're delighted to see that Jiangsu Leadmicro Nano-Equipment Technology's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 55% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Jiangsu Leadmicro Nano-Equipment Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

While Jiangsu Leadmicro Nano-Equipment 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com