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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Raytron TechnologyLtd (SHSE:688002) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Raytron TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = CN¥478m ÷ (CN¥8.7b - CN¥1.9b) (Based on the trailing twelve months to June 2024).
Thus, Raytron TechnologyLtd has an ROCE of 7.0%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.
In the above chart we have measured Raytron TechnologyLtd'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 Raytron TechnologyLtd .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Raytron TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Raytron TechnologyLtd's current liabilities have increased over the last five years to 22% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Raytron TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 51% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Raytron TechnologyLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688002 on our platform quite valuable.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
