There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 Bomin Electronics (SHSE:603936) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Bomin Electronics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0058 = CN¥36m ÷ (CN¥8.3b - CN¥2.1b) (Based on the trailing twelve months to September 2023).
Therefore, Bomin Electronics has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.
See our latest analysis for Bomin Electronics
In the above chart we have measured Bomin Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bomin Electronics.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Bomin Electronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.7% over the last five years. However it looks like Bomin Electronics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
On a side note, Bomin Electronics has done well to pay down its current liabilities to 25% 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.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Bomin Electronics' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 39% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we've found 3 warning signs for Bomin Electronics that we think you should be aware of.
While Bomin Electronics 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.