If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. So when we looked at Newland Digital TechnologyLtd (SZSE:000997) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Newland Digital TechnologyLtd is:

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

0.16 = CN¥1.2b ÷ (CN¥13b - CN¥5.1b) (Based on the trailing twelve months to September 2024).

So, Newland Digital TechnologyLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 2.3% it's much better.

Above you can see how the current ROCE for Newland Digital TechnologyLtd 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 Newland Digital TechnologyLtd for free.

The Trend Of ROCE

Newland Digital TechnologyLtd's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 47% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Newland Digital TechnologyLtd's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Newland Digital TechnologyLtd's ROCE

In summary, we're delighted to see that Newland Digital TechnologyLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 43% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Newland Digital TechnologyLtd can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Newland Digital TechnologyLtd you'll probably want to know about.

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.