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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at China Marine Information Electronics (SHSE:600764) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on China Marine Information Electronics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = CN¥449m ÷ (CN¥11b - CN¥2.8b) (Based on the trailing twelve months to September 2023).
So, China Marine Information Electronics has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.
Check out our latest analysis for China Marine Information Electronics
In the above chart we have measured China Marine Information Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Marine Information Electronics here for free.
What Can We Tell From China Marine Information Electronics' ROCE Trend?
There are better returns on capital out there than what we're seeing at China Marine Information Electronics. Over the past five years, ROCE has remained relatively flat at around 5.4% and the business has deployed 603% 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.
In Conclusion...
In conclusion, China Marine Information Electronics has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 8.6% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
China Marine Information Electronics does have some risks though, and we've spotted 1 warning sign for China Marine Information Electronics that you might be interested in.
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.
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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.