To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 investigating Jiangsu Favored Nanotechnology (SHSE:688371), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Jiangsu Favored Nanotechnology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0033 = CN¥6.3m ÷ (CN¥2.0b - CN¥120m) (Based on the trailing twelve months to September 2024).
Therefore, Jiangsu Favored Nanotechnology has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.
Above you can see how the current ROCE for Jiangsu Favored Nanotechnology 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 Jiangsu Favored Nanotechnology for free.
So How Is Jiangsu Favored Nanotechnology's ROCE Trending?
When we looked at the ROCE trend at Jiangsu Favored Nanotechnology, we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 0.3%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Jiangsu Favored Nanotechnology has done well to pay down its current liabilities to 5.9% of total assets. That could partly explain why the ROCE has dropped. 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.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Favored Nanotechnology is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know more about Jiangsu Favored Nanotechnology, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.
While Jiangsu Favored Nanotechnology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
