To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Nanjing LES Information Technology (SHSE:688631), it didn't seem to tick all of these boxes.

Understanding 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 Nanjing LES Information Technology, this is the formula:

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

0.062 = CN¥119m ÷ (CN¥3.4b - CN¥1.5b) (Based on the trailing twelve months to March 2024).

So, Nanjing LES Information Technology has an ROCE of 6.2%. On its own that's a low return, but compared to the average of 4.3% generated by the Aerospace & Defense industry, it's much better.

In the above chart we have measured Nanjing LES Information Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Nanjing LES Information Technology for free.

What Can We Tell From Nanjing LES Information Technology's ROCE Trend?

In terms of Nanjing LES Information Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.7% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Nanjing LES Information Technology has decreased its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Nanjing LES Information Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Nanjing LES Information Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 85% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Nanjing LES Information Technology, we've discovered 1 warning sign that you should be aware of.

While Nanjing LES Information Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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