What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Tianjin Ruixin TechnologyLtd (SZSE:300828) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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 Tianjin Ruixin TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = CN¥79m ÷ (CN¥904m - CN¥57m) (Based on the trailing twelve months to September 2023).
So, Tianjin Ruixin TechnologyLtd has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.3% generated by the Metals and Mining industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tianjin Ruixin TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Tianjin Ruixin TechnologyLtd has performed in the past in other metrics, you can view this free graph of Tianjin Ruixin TechnologyLtd's past earnings, revenue and cash flow.
So How Is Tianjin Ruixin TechnologyLtd's ROCE Trending?
In terms of Tianjin Ruixin TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.4% from 17% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Tianjin Ruixin TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 35% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Tianjin Ruixin TechnologyLtd has the makings of a multi-bagger.
One final note, you should learn about the 2 warning signs we've spotted with Tianjin Ruixin TechnologyLtd (including 1 which is significant) .
While Tianjin Ruixin TechnologyLtd 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.