If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Aoshikang Technology (SZSE:002913) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Aoshikang Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥505m ÷ (CN¥7.3b - CN¥2.3b) (Based on the trailing twelve months to March 2024).
So, Aoshikang Technology has an ROCE of 10.0%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Aoshikang Technology's ROCE against it's prior returns. If you'd like to look at how Aoshikang Technology has performed in the past in other metrics, you can view this free graph of Aoshikang Technology's past earnings, revenue and cash flow.
So How Is Aoshikang Technology's ROCE Trending?
The returns on capital haven't changed much for Aoshikang Technology in recent years. Over the past five years, ROCE has remained relatively flat at around 10.0% and the business has deployed 123% more capital into its operations. 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.
Our Take On Aoshikang Technology's ROCE
As we've seen above, Aoshikang Technology's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Aoshikang Technology and understanding this should be part of your investment process.
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.