To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Jadard Technology (SHSE:688252), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Jadard Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = CN¥185m ÷ (CN¥2.4b - CN¥348m) (Based on the trailing twelve months to September 2024).
Therefore, Jadard Technology has an ROCE of 8.8%. On its own that's a low return, but compared to the average of 4.9% generated by the Semiconductor industry, it's much better.
Above you can see how the current ROCE for Jadard Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jadard Technology .
What Can We Tell From Jadard Technology's ROCE Trend?
In terms of Jadard Technology's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.8% and the business has deployed 1,927% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Jadard Technology has done well to reduce current liabilities to 14% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On Jadard Technology's ROCE
In conclusion, Jadard Technology has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 26% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to know some of the risks facing Jadard Technology we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
While Jadard Technology 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.