To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of G-bits Network Technology (Xiamen) (SHSE:603444) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for G-bits Network Technology (Xiamen):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = CN¥1.9b ÷ (CN¥6.5b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
Therefore, G-bits Network Technology (Xiamen) has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 4.4%.
Above you can see how the current ROCE for G-bits Network Technology (Xiamen) 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 G-bits Network Technology (Xiamen) for free.
How Are Returns Trending?
Investors would be pleased with what's happening at G-bits Network Technology (Xiamen). The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 38%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 71%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
To sum it up, G-bits Network Technology (Xiamen) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 39% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, G-bits Network Technology (Xiamen) does come with some risks, and we've found 1 warning sign that you should be aware of.
G-bits Network Technology (Xiamen) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
