What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Cosonic Intelligent Technologies (SZSE:300793), 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Cosonic Intelligent Technologies is:

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

0.044 = CN¥113m ÷ (CN¥3.7b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Cosonic Intelligent Technologies has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cosonic Intelligent Technologies' ROCE against it's prior returns. If you'd like to look at how Cosonic Intelligent Technologies has performed in the past in other metrics, you can view this free graph of Cosonic Intelligent Technologies' past earnings, revenue and cash flow.

What Can We Tell From Cosonic Intelligent Technologies' ROCE Trend?

On the surface, the trend of ROCE at Cosonic Intelligent Technologies doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 4.4%. However it looks like Cosonic Intelligent Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Cosonic Intelligent Technologies has decreased its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Cosonic Intelligent Technologies' ROCE

To conclude, we've found that Cosonic Intelligent Technologies is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 2.3% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Cosonic Intelligent Technologies (including 1 which is significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.