If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nuode New MaterialsLtd (SHSE:600110) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Nuode New MaterialsLtd is:

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

0.038 = CN¥377m ÷ (CN¥14b - CN¥4.1b) (Based on the trailing twelve months to June 2023).

So, Nuode New MaterialsLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.

See our latest analysis for Nuode New MaterialsLtd

Above you can see how the current ROCE for Nuode New MaterialsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nuode New MaterialsLtd.

What Does the ROCE Trend For Nuode New MaterialsLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 191%. Usually this isn't ideal, but given Nuode New MaterialsLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Nuode New MaterialsLtd might not have received a full period of earnings contribution from it.

On a related note, Nuode New MaterialsLtd has decreased its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Nuode New MaterialsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Nuode New MaterialsLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 56% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Nuode New MaterialsLtd, we've spotted 3 warning signs, and 1 of them is concerning.

While Nuode New MaterialsLtd 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.