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. 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. 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 briefly looking over the numbers, we don't think Nanjing CIGU TechnologyLTD (SHSE:688448) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Nanjing CIGU TechnologyLTD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = CN¥23m ÷ (CN¥1.4b - CN¥385m) (Based on the trailing twelve months to September 2023).
Thus, Nanjing CIGU TechnologyLTD has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.
See our latest analysis for Nanjing CIGU TechnologyLTD
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Nanjing CIGU TechnologyLTD, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Nanjing CIGU TechnologyLTD, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 2.3% from 18% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Nanjing CIGU TechnologyLTD has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. 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 Bottom Line On Nanjing CIGU TechnologyLTD's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Nanjing CIGU TechnologyLTD is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 40% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Nanjing CIGU TechnologyLTD does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.
While Nanjing CIGU TechnologyLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.