There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Cetc Potevio Science&TechnologyLtd (SZSE:002544) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Cetc Potevio Science&TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = CN¥149m ÷ (CN¥10b - CN¥6.1b) (Based on the trailing twelve months to September 2023).
So, Cetc Potevio Science&TechnologyLtd has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Communications industry average of 5.1%.
Check out our latest analysis for Cetc Potevio Science&TechnologyLtd
In the above chart we have measured Cetc Potevio Science&TechnologyLtd's 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 Cetc Potevio Science&TechnologyLtd here for free.
So How Is Cetc Potevio Science&TechnologyLtd's ROCE Trending?
When we looked at the ROCE trend at Cetc Potevio Science&TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.5% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
Another thing to note, Cetc Potevio Science&TechnologyLtd has a high ratio of current liabilities to total assets of 59%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Cetc Potevio Science&TechnologyLtd's ROCE
To conclude, we've found that Cetc Potevio Science&TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a final note, we've found 1 warning sign for Cetc Potevio Science&TechnologyLtd that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.