If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Inspur Electronic Information Industry (SZSE:000977) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Inspur Electronic Information Industry:

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

0.071 = CN¥1.9b ÷ (CN¥84b - CN¥57b) (Based on the trailing twelve months to September 2024).

Therefore, Inspur Electronic Information Industry has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.4% generated by the Tech industry, it's much better.

Above you can see how the current ROCE for Inspur Electronic Information Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Inspur Electronic Information Industry for free.

What The Trend Of ROCE Can Tell Us

In terms of Inspur Electronic Information Industry's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.1% for the last five years, and the capital employed within the business has risen 153% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 68% of total assets, this reported ROCE would probably be less than7.1% because total capital employed would be higher.The 7.1% ROCE could be even lower if current liabilities weren't 68% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Key Takeaway

As we've seen above, Inspur Electronic Information Industry's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 66% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Inspur Electronic Information Industry 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.