If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of New Trend International Logis-TechLtd (SZSE:300532) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for New Trend International Logis-TechLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = CN¥480m ÷ (CN¥4.6b - CN¥2.7b) (Based on the trailing twelve months to June 2024).
Therefore, New Trend International Logis-TechLtd has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 3.0% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for New Trend International Logis-TechLtd's ROCE against it's prior returns. If you're interested in investigating New Trend International Logis-TechLtd's past further, check out this free graph covering New Trend International Logis-TechLtd's past earnings, revenue and cash flow.
What Can We Tell From New Trend International Logis-TechLtd's ROCE Trend?
New Trend International Logis-TechLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 125%. So we're very much inspired by what we're seeing at New Trend International Logis-TechLtd thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what New Trend International Logis-TechLtd has. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we've found 1 warning sign for New Trend International Logis-TechLtd that we think you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.