Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating North Electro-OpticLtd (SHSE:600184), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on North Electro-OpticLtd is:

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

0.014 = CN¥35m ÷ (CN¥4.4b - CN¥1.8b) (Based on the trailing twelve months to March 2023).

Therefore, North Electro-OpticLtd has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 4.2%.

See our latest analysis for North Electro-OpticLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for North Electro-OpticLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of North Electro-OpticLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Over the past five years, North Electro-OpticLtd's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect North Electro-OpticLtd to be a multi-bagger going forward.

On a separate but related note, it's important to know that North Electro-OpticLtd has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From North Electro-OpticLtd's ROCE

We can conclude that in regards to North Electro-OpticLtd's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think North Electro-OpticLtd has the makings of a multi-bagger.

If you want to continue researching North Electro-OpticLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.