To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Changsha Jingjia Microelectronics (SZSE:300474), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Changsha Jingjia Microelectronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥81m ÷ (CN¥3.9b - CN¥506m) (Based on the trailing twelve months to June 2023).
Therefore, Changsha Jingjia Microelectronics has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.4%.
Check out our latest analysis for Changsha Jingjia Microelectronics
Above you can see how the current ROCE for Changsha Jingjia Microelectronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Changsha Jingjia Microelectronics here for free.
What Can We Tell From Changsha Jingjia Microelectronics' ROCE Trend?
We weren't thrilled with the trend because Changsha Jingjia Microelectronics' ROCE has reduced by 78% over the last five years, while the business employed 224% more capital. Usually this isn't ideal, but given Changsha Jingjia Microelectronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Changsha Jingjia Microelectronics' earnings and if they change as a result from the capital raise.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Changsha Jingjia Microelectronics have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 220% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Changsha Jingjia Microelectronics does have some risks though, and we've spotted 3 warning signs for Changsha Jingjia Microelectronics that you might be interested in.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
