There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Jiangsu Asia-Pacific Light Alloy Technology (SZSE:002540), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Jiangsu Asia-Pacific Light Alloy Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = CN¥534m ÷ (CN¥7.3b - CN¥535m) (Based on the trailing twelve months to September 2023).
Thus, Jiangsu Asia-Pacific Light Alloy Technology has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 6.3% generated by the Metals and Mining industry, it's much better.
See our latest analysis for Jiangsu Asia-Pacific Light Alloy Technology
Above you can see how the current ROCE for Jiangsu Asia-Pacific Light Alloy Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Jiangsu Asia-Pacific Light Alloy Technology's ROCE Trend?
The returns on capital haven't changed much for Jiangsu Asia-Pacific Light Alloy Technology in recent years. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 41% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Jiangsu Asia-Pacific Light Alloy Technology's ROCE
In conclusion, Jiangsu Asia-Pacific Light Alloy Technology has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Like most companies, Jiangsu Asia-Pacific Light Alloy Technology does come with some risks, and we've found 2 warning signs that you should be aware of.
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.
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.
