To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangsu New Technology GroupLtd (SZSE:301229) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Jiangsu New Technology GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = CN¥85m ÷ (CN¥1.6b - CN¥329m) (Based on the trailing twelve months to June 2024).
So, Jiangsu New Technology GroupLtd has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.2%.
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're interested in investigating Jiangsu New Technology GroupLtd's past further, check out this free graph covering Jiangsu New Technology GroupLtd's past earnings, revenue and cash flow.
So How Is Jiangsu New Technology GroupLtd's ROCE Trending?
On the surface, the trend of ROCE at Jiangsu New Technology GroupLtd doesn't inspire confidence. Over the last three years, returns on capital have decreased to 6.8% from 21% three years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu New Technology GroupLtd. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Jiangsu New Technology GroupLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 301229 on our platform quite valuable.
While Jiangsu New Technology GroupLtd 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.
