To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, Jiangsu JIXIN Wind Energy Technology (SHSE:601218) looks quite promising in regards to its trends of return on capital.

Understanding 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 Jiangsu JIXIN Wind Energy Technology:

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

0.036 = CN¥118m ÷ (CN¥3.7b - CN¥381m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu JIXIN Wind Energy Technology has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu JIXIN Wind Energy Technology's ROCE against it's prior returns. If you're interested in investigating Jiangsu JIXIN Wind Energy Technology's past further, check out this free graph covering Jiangsu JIXIN Wind Energy Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangsu JIXIN Wind Energy Technology Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Jiangsu JIXIN Wind Energy Technology promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 72% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, Jiangsu JIXIN Wind Energy Technology has decreased current liabilities to 10% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Jiangsu JIXIN Wind Energy Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Jiangsu JIXIN Wind Energy Technology's ROCE

As discussed above, Jiangsu JIXIN Wind Energy Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 25% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 1 warning sign with Jiangsu JIXIN Wind Energy Technology and understanding it should be part of your investment process.

While Jiangsu JIXIN Wind Energy Technology 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.