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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 briefly looking over the numbers, we don't think Ningbo Yongxin OpticsLtd (SHSE:603297) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Ningbo Yongxin OpticsLtd:

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

0.062 = CN¥118m ÷ (CN¥2.2b - CN¥331m) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Yongxin OpticsLtd has an ROCE of 6.2%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

In the above chart we have measured Ningbo Yongxin OpticsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ningbo Yongxin OpticsLtd for free.

What Can We Tell From Ningbo Yongxin OpticsLtd's ROCE Trend?

When we looked at the ROCE trend at Ningbo Yongxin OpticsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.2% from 9.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Ningbo Yongxin OpticsLtd's ROCE

To conclude, we've found that Ningbo Yongxin OpticsLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 174% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Ningbo Yongxin OpticsLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

While Ningbo Yongxin OpticsLtd 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.