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. 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 Chang Lan Technology Group (SZSE:002879) and its ROCE trend, we weren't exactly thrilled.
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 Chang Lan Technology Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = CN¥93m ÷ (CN¥2.5b - CN¥620m) (Based on the trailing twelve months to September 2024).
Thus, Chang Lan Technology Group has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.8%.
Above you can see how the current ROCE for Chang Lan Technology Group 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 Chang Lan Technology Group for free.
So How Is Chang Lan Technology Group's ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 8.3% five years ago, while capital employed has grown 27%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Chang Lan Technology Group's earnings and if they change as a result from the capital raise.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 24%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
The Bottom Line
In summary, Chang Lan Technology Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Chang Lan Technology Group does have some risks though, and we've spotted 1 warning sign for Chang Lan Technology Group that you might be interested in.
While Chang Lan Technology Group 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.
