What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So on that note, Newland Digital TechnologyLtd (SZSE:000997) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Newland Digital TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥1.2b ÷ (CN¥12b - CN¥5.8b) (Based on the trailing twelve months to September 2023).
Therefore, Newland Digital TechnologyLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 2.6% it's much better.
View our latest analysis for Newland Digital TechnologyLtd
Above you can see how the current ROCE for Newland Digital TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Newland Digital TechnologyLtd.
The Trend Of ROCE
The trends we've noticed at Newland Digital TechnologyLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, Newland Digital TechnologyLtd's current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Newland Digital TechnologyLtd's ROCE
All in all, it's terrific to see that Newland Digital TechnologyLtd is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing, we've spotted 3 warning signs facing Newland Digital TechnologyLtd that you might find interesting.
While Newland Digital 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.