Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 briefly looking over the numbers, we don't think CETC Cyberspace Security Technology (SZSE:002268) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CETC Cyberspace Security Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = CN¥100m ÷ (CN¥7.1b - CN¥1.6b) (Based on the trailing twelve months to March 2024).
Thus, CETC Cyberspace Security Technology has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Software industry average of 3.0%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of CETC Cyberspace Security Technology.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at CETC Cyberspace Security Technology. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 1.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
Long story short, while CETC Cyberspace Security Technology has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
CETC Cyberspace Security Technology could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002268 on our platform quite valuable.
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.