To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at Motic (Xiamen) Electric GroupLtd's (SZSE:300341) ROCE trend, we were pretty happy with what we saw.
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. Analysts use this formula to calculate it for Motic (Xiamen) Electric GroupLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥266m ÷ (CN¥2.3b - CN¥460m) (Based on the trailing twelve months to September 2023).
Thus, Motic (Xiamen) Electric GroupLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.3% it's much better.
See our latest analysis for Motic (Xiamen) Electric GroupLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Motic (Xiamen) Electric GroupLtd's ROCE against it's prior returns. If you'd like to look at how Motic (Xiamen) Electric GroupLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 66% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Motic (Xiamen) Electric GroupLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In Conclusion...
To sum it up, Motic (Xiamen) Electric GroupLtd has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 119% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to know some of the risks facing Motic (Xiamen) Electric GroupLtd we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
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.
