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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Keli Sensing Technology (Ningbo)Ltd (SHSE:603662) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Keli Sensing Technology (Ningbo)Ltd, this is the formula:

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

0.073 = CN¥217m ÷ (CN¥4.2b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Therefore, Keli Sensing Technology (Ningbo)Ltd has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.9% generated by the Electrical industry, it's much better.

Above you can see how the current ROCE for Keli Sensing Technology (Ningbo)Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Keli Sensing Technology (Ningbo)Ltd .

How Are Returns Trending?

In terms of Keli Sensing Technology (Ningbo)Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.3%. However it looks like Keli Sensing Technology (Ningbo)Ltd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Keli Sensing Technology (Ningbo)Ltd's ROCE

Bringing it all together, while we're somewhat encouraged by Keli Sensing Technology (Ningbo)Ltd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 89% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Keli Sensing Technology (Ningbo)Ltd does come with some risks, and we've found 2 warning signs that you should be aware of.

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.