Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Crystal Growth & Energy EquipmentLtd (SHSE:688478), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. The formula for this calculation on Crystal Growth & Energy EquipmentLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = CN¥39m ÷ (CN¥1.9b - CN¥303m) (Based on the trailing twelve months to September 2024).
Thus, Crystal Growth & Energy EquipmentLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.9%.
In the above chart we have measured Crystal Growth & Energy EquipmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Crystal Growth & Energy EquipmentLtd .
So How Is Crystal Growth & Energy EquipmentLtd's ROCE Trending?
On the surface, the trend of ROCE at Crystal Growth & Energy EquipmentLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 3.7% over the last two years. 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.
The Bottom Line
While returns have fallen for Crystal Growth & Energy EquipmentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 37% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Crystal Growth & Energy EquipmentLtd (of which 1 doesn't sit too well with us!) 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.
