What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Nanjing CIGU TechnologyLTD (SHSE:688448) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Nanjing CIGU TechnologyLTD:

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

0.028 = CN¥28m ÷ (CN¥1.4b - CN¥352m) (Based on the trailing twelve months to June 2024).

Therefore, Nanjing CIGU TechnologyLTD has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing CIGU TechnologyLTD's ROCE against it's prior returns. If you'd like to look at how Nanjing CIGU TechnologyLTD has performed in the past in other metrics, you can view this free graph of Nanjing CIGU TechnologyLTD's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Nanjing CIGU TechnologyLTD, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 2.8%. 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 related note, Nanjing CIGU TechnologyLTD has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

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 Nanjing CIGU TechnologyLTD. These trends are starting to be recognized by investors since the stock has delivered a 3.2% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Nanjing CIGU TechnologyLTD (of which 1 is potentially serious!) that you should know about.

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.