What trends should we look for it we want to identify stocks that can 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. Looking at G-bits Network Technology (Xiamen) (SHSE:603444), it does have a high ROCE right now, but lets see how returns are trending.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for G-bits Network Technology (Xiamen), this is the formula:

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

0.22 = CN¥1.2b ÷ (CN¥6.7b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

So, G-bits Network Technology (Xiamen) has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 5.3% earned by companies in a similar industry.

In the above chart we have measured G-bits Network Technology (Xiamen)'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 analyst report for G-bits Network Technology (Xiamen) .

What Can We Tell From G-bits Network Technology (Xiamen)'s ROCE Trend?

In terms of G-bits Network Technology (Xiamen)'s historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 35% where it was five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line

In summary, we're somewhat concerned by G-bits Network Technology (Xiamen)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 22% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with G-bits Network Technology (Xiamen) and understanding it should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.