If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 briefly looking over the numbers, we don't think Runner (Xiamen) (SHSE:603408) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Runner (Xiamen):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥336m ÷ (CN¥4.8b - CN¥1.8b) (Based on the trailing twelve months to September 2023).
So, Runner (Xiamen) has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 6.4% it's much better.
See our latest analysis for Runner (Xiamen)
Historical performance is a great place to start when researching a stock so above you can see the gauge for Runner (Xiamen)'s ROCE against it's prior returns. If you're interested in investigating Runner (Xiamen)'s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Runner (Xiamen) Tell Us?
In terms of Runner (Xiamen)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, Runner (Xiamen) has done well to pay down its current liabilities to 37% 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.
Our Take On Runner (Xiamen)'s ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Runner (Xiamen) have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 15% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 1 warning sign facing Runner (Xiamen) that you might find interesting.
While Runner (Xiamen) 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.