There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jiangsu Transimage Technology (SZSE:002866) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu Transimage Technology, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.041 = CN¥95m ÷ (CN¥4.4b - CN¥2.0b) (Based on the trailing twelve months to September 2023).

Therefore, Jiangsu Transimage Technology has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.1%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Transimage Technology's ROCE against it's prior returns. If you're interested in investigating Jiangsu Transimage Technology's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Jiangsu Transimage Technology's ROCE Trending?

We weren't thrilled with the trend because Jiangsu Transimage Technology's ROCE has reduced by 61% over the last five years, while the business employed 124% more capital. That being said, Jiangsu Transimage Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Jiangsu Transimage Technology might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

We're a bit apprehensive about Jiangsu Transimage Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 8.2% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Jiangsu Transimage Technology you'll probably want to know about.

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.