If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Loncin Motor (SHSE:603766), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Loncin Motor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = CN¥711m ÷ (CN¥14b - CN¥4.6b) (Based on the trailing twelve months to September 2023).
Therefore, Loncin Motor has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 3.0% generated by the Auto 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 Loncin Motor's ROCE against it's prior returns. If you're interested in investigating Loncin Motor's past further, check out this free graph covering Loncin Motor's past earnings, revenue and cash flow.
What Does the ROCE Trend For Loncin Motor Tell Us?
When we looked at the ROCE trend at Loncin Motor, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.7% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
In summary, Loncin Motor is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 6.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 3 warning signs with Loncin Motor (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.
While Loncin Motor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
