What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Newcapec Electronics (SZSE:300248), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Newcapec Electronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥130m ÷ (CN¥2.7b - CN¥454m) (Based on the trailing twelve months to September 2023).
So, Newcapec Electronics has an ROCE of 5.9%. On its own, that's a low figure but it's around the 5.1% average generated by the Electronic industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Newcapec Electronics' ROCE against it's prior returns. If you're interested in investigating Newcapec Electronics' past further, check out this free graph covering Newcapec Electronics' past earnings, revenue and cash flow.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Newcapec Electronics. The company has consistently earned 5.9% for the last five years, and the capital employed within the business has risen 52% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
In summary, Newcapec Electronics has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Newcapec Electronics has the makings of a multi-bagger.
Newcapec Electronics does have some risks though, and we've spotted 1 warning sign for Newcapec Electronics that you might be interested in.
While Newcapec Electronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
