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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Chengdu Information Technology of Chinese Academy of SciencesLtd (SZSE:300678), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Chengdu Information Technology of Chinese Academy of SciencesLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0039 = CN¥3.4m ÷ (CN¥1.0b - CN¥172m) (Based on the trailing twelve months to September 2024).
Therefore, Chengdu Information Technology of Chinese Academy of SciencesLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.7%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Chengdu Information Technology of Chinese Academy of SciencesLtd has performed in the past in other metrics, you can view this free graph of Chengdu Information Technology of Chinese Academy of SciencesLtd's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Chengdu Information Technology of Chinese Academy of SciencesLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.4% from 8.2% five years ago. However it looks like Chengdu Information Technology of Chinese Academy of SciencesLtd 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 may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, Chengdu Information Technology of Chinese Academy of SciencesLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 176% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to know some of the risks facing Chengdu Information Technology of Chinese Academy of SciencesLtd we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
While Chengdu Information Technology of Chinese Academy of SciencesLtd 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.
