What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Nanjing Baose (SZSE:300402) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nanjing Baose is:

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

0.031 = CN¥51m ÷ (CN¥2.3b - CN¥642m) (Based on the trailing twelve months to September 2024).

Thus, Nanjing Baose has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Baose's ROCE against it's prior returns. If you'd like to look at how Nanjing Baose has performed in the past in other metrics, you can view this free graph of Nanjing Baose's past earnings, revenue and cash flow.

So How Is Nanjing Baose's ROCE Trending?

On the surface, the trend of ROCE at Nanjing Baose doesn't inspire confidence. Around five years ago the returns on capital were 5.8%, but since then they've fallen to 3.1%. 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.

On a related note, Nanjing Baose has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Nanjing Baose is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Nanjing Baose does come with some risks, and we've found 2 warning signs that you should be aware of.

While Nanjing Baose 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.