To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 on that note, Forehope Electronic (Ningbo) (SHSE:688362) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Forehope Electronic (Ningbo) is:

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

0.00058 = CN¥5.9m ÷ (CN¥14b - CN¥3.6b) (Based on the trailing twelve months to June 2024).

Thus, Forehope Electronic (Ningbo) has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.8%.

In the above chart we have measured Forehope Electronic (Ningbo)'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 Forehope Electronic (Ningbo) for free.

How Are Returns Trending?

We're delighted to see that Forehope Electronic (Ningbo) is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.06% on its capital. And unsurprisingly, like most companies trying to break into the black, Forehope Electronic (Ningbo) is utilizing 2,871% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Forehope Electronic (Ningbo)'s ROCE

Long story short, we're delighted to see that Forehope Electronic (Ningbo)'s reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 51% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Forehope Electronic (Ningbo), we've discovered 1 warning sign that you should be aware of.

While Forehope Electronic (Ningbo) 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.