To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Changsha Jingjia Microelectronics (SZSE:300474), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Changsha Jingjia Microelectronics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = CN¥66m ÷ (CN¥4.2b - CN¥638m) (Based on the trailing twelve months to September 2023).
Therefore, Changsha Jingjia Microelectronics has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.7%.
Above you can see how the current ROCE for Changsha Jingjia Microelectronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Changsha Jingjia Microelectronics here for free.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 225%. That being said, Changsha Jingjia Microelectronics 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 Changsha Jingjia Microelectronics might not have received a full period of earnings contribution from it.
Our Take On Changsha Jingjia Microelectronics' ROCE
We're a bit apprehensive about Changsha Jingjia Microelectronics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 116% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you want to continue researching Changsha Jingjia Microelectronics, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
