If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Gian Technology (SZSE:300709), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Jiangsu Gian Technology:

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

0.083 = CN¥184m ÷ (CN¥3.2b - CN¥1.0b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Gian Technology has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.8%.

Above you can see how the current ROCE for Jiangsu Gian Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Gian Technology .

So How Is Jiangsu Gian Technology's ROCE Trending?

On the surface, the trend of ROCE at Jiangsu Gian Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.3% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Jiangsu Gian Technology is reinvesting in the business, but returns have been falling. Since the stock has declined 20% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Jiangsu Gian Technology has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Jiangsu Gian Technology and understanding this should be part of your investment process.

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.