To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Yunnan Nantian Electronics InformationLtd (SZSE:000948) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Yunnan Nantian Electronics InformationLtd:

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

0.031 = CN¥99m ÷ (CN¥8.7b - CN¥5.5b) (Based on the trailing twelve months to September 2024).

Therefore, Yunnan Nantian Electronics InformationLtd has an ROCE of 3.1%. In absolute terms, that's a low return but it's around the IT industry average of 3.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yunnan Nantian Electronics InformationLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Yunnan Nantian Electronics InformationLtd.

What Does the ROCE Trend For Yunnan Nantian Electronics InformationLtd Tell Us?

On the surface, the trend of ROCE at Yunnan Nantian Electronics InformationLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.1% from 4.1% 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.

On a side note, Yunnan Nantian Electronics InformationLtd's current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Yunnan Nantian Electronics InformationLtd's ROCE

To conclude, we've found that Yunnan Nantian Electronics InformationLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

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.