To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Wuxi NCE PowerLtd (SHSE:605111), it didn't seem to tick all of these boxes.

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. To calculate this metric for Wuxi NCE PowerLtd, this is the formula:

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

0.08 = CN¥305m ÷ (CN¥4.4b - CN¥609m) (Based on the trailing twelve months to March 2024).

So, Wuxi NCE PowerLtd has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 3.9% generated by the Semiconductor industry, it's much better.

In the above chart we have measured Wuxi NCE PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wuxi NCE PowerLtd .

So How Is Wuxi NCE PowerLtd's ROCE Trending?

When we looked at the ROCE trend at Wuxi NCE PowerLtd, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 8.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Wuxi NCE PowerLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Wuxi NCE PowerLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 43% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Wuxi NCE PowerLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 605111 on our platform quite valuable.

While Wuxi NCE PowerLtd 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.