There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at NET263 (SZSE:002467) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on NET263 is:

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

0.037 = CN¥75m ÷ (CN¥2.4b - CN¥318m) (Based on the trailing twelve months to September 2024).

So, NET263 has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 12%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for NET263's ROCE against it's prior returns. If you'd like to look at how NET263 has performed in the past in other metrics, you can view this free graph of NET263's past earnings, revenue and cash flow.

So How Is NET263's ROCE Trending?

There hasn't been much to report for NET263's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if NET263 doesn't end up being a multi-bagger in a few years time.

Our Take On NET263's ROCE

We can conclude that in regards to NET263's returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last five years. Therefore based on the analysis done in this article, we don't think NET263 has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing NET263 that you might find interesting.

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.