Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd (SZSE:300826), 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 NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd is:

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

0.025 = CN¥38m ÷ (CN¥2.5b - CN¥990m) (Based on the trailing twelve months to March 2024).

So, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 5.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd.

So How Is NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's ROCE Trending?

When we looked at the ROCE trend at NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 13% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd has the makings of a multi-bagger.

NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd does have some risks, we noticed 6 warning signs (and 2 which don't sit too well with us) we think you should know about.

While NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd 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.

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