If you're looking for a multi-bagger, there's a few things to keep an eye out 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. 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 Newcapec Electronics (SZSE:300248) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for Newcapec Electronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = CN¥153m ÷ (CN¥2.6b - CN¥350m) (Based on the trailing twelve months to September 2024).
So, Newcapec Electronics has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Newcapec Electronics' ROCE against it's prior returns. If you're interested in investigating Newcapec Electronics' past further, check out this free graph covering Newcapec Electronics' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Newcapec Electronics, we didn't gain much confidence. Around five years ago the returns on capital were 8.5%, but since then they've fallen to 6.7%. However it looks like Newcapec Electronics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
To conclude, we've found that Newcapec Electronics is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing: We've identified 3 warning signs with Newcapec Electronics (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.
While Newcapec Electronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
