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'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. However, after investigating Qingdao NovelBeam TechnologyLtd (SHSE:688677), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Qingdao NovelBeam TechnologyLtd, this is the formula:

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

0.10 = CN¥137m ÷ (CN¥1.4b - CN¥58m) (Based on the trailing twelve months to March 2024).

Thus, Qingdao NovelBeam TechnologyLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Medical Equipment industry.

In the above chart we have measured Qingdao NovelBeam TechnologyLtd'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 Qingdao NovelBeam TechnologyLtd for free.

What Can We Tell From Qingdao NovelBeam TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Qingdao NovelBeam TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 28% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a related note, Qingdao NovelBeam TechnologyLtd has decreased its current liabilities to 4.2% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From Qingdao NovelBeam TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Qingdao NovelBeam TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 1 warning sign facing Qingdao NovelBeam TechnologyLtd that you might find interesting.

While Qingdao NovelBeam TechnologyLtd 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.

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