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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Hainan Jinpan Smart Technology's (SHSE:688676) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for Hainan Jinpan Smart Technology:

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

0.12 = CN¥579m ÷ (CN¥8.4b - CN¥3.4b) (Based on the trailing twelve months to March 2024).

So, Hainan Jinpan Smart Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

In the above chart we have measured Hainan Jinpan Smart Technology'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 Hainan Jinpan Smart Technology .

What Does the ROCE Trend For Hainan Jinpan Smart Technology Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 193% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Hainan Jinpan Smart Technology has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Hainan Jinpan Smart Technology's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Hainan Jinpan Smart Technology's ROCE

To sum it up, Hainan Jinpan Smart Technology has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 244% return to those who've held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we found 4 warning signs for Hainan Jinpan Smart Technology (2 are potentially serious) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com