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 Jiangnan Yifan MotorLtd (SZSE:301023) and its ROCE trend, we weren't exactly thrilled.

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

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 Jiangnan Yifan MotorLtd is:

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

0.072 = CN¥58m ÷ (CN¥883m - CN¥68m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangnan Yifan MotorLtd has an ROCE of 7.2%. 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.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangnan Yifan MotorLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangnan Yifan MotorLtd.

What Can We Tell From Jiangnan Yifan MotorLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangnan Yifan MotorLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.2% from 34% five 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.

On a related note, Jiangnan Yifan MotorLtd has decreased its current liabilities to 7.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From Jiangnan Yifan MotorLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangnan Yifan MotorLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.6% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Jiangnan Yifan MotorLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.