If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Ningbo Water Meter (Group)Ltd (SHSE:603700) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Ningbo Water Meter (Group)Ltd is:

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

0.077 = CN¥121m ÷ (CN¥2.3b - CN¥674m) (Based on the trailing twelve months to June 2024).

Therefore, Ningbo Water Meter (Group)Ltd has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.4% generated by the Electronic industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Water Meter (Group)Ltd's ROCE against it's prior returns. If you'd like to look at how Ningbo Water Meter (Group)Ltd has performed in the past in other metrics, you can view this free graph of Ningbo Water Meter (Group)Ltd's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Ningbo Water Meter (Group)Ltd doesn't inspire confidence. To be more specific, ROCE has fallen from 15% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Ningbo Water Meter (Group)Ltd's ROCE

In summary, Ningbo Water Meter (Group)Ltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Ningbo Water Meter (Group)Ltd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.