There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Wuxi New Hongtai Electrical TechnologyLtd (SHSE:603016) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wuxi New Hongtai Electrical TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = CN¥66m ÷ (CN¥1.0b - CN¥177m) (Based on the trailing twelve months to September 2023).
So, Wuxi New Hongtai Electrical TechnologyLtd has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 6.3% generated by the Electrical industry, it's much better.
See our latest analysis for Wuxi New Hongtai Electrical TechnologyLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi New Hongtai Electrical TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wuxi New Hongtai Electrical TechnologyLtd, check out these free graphs here.
What Does the ROCE Trend For Wuxi New Hongtai Electrical TechnologyLtd Tell Us?
Things have been pretty stable at Wuxi New Hongtai Electrical TechnologyLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Wuxi New Hongtai Electrical TechnologyLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line On Wuxi New Hongtai Electrical TechnologyLtd's ROCE
In a nutshell, Wuxi New Hongtai Electrical TechnologyLtd has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 55% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 1 warning sign facing Wuxi New Hongtai Electrical TechnologyLtd that you might find interesting.
While Wuxi New Hongtai Electrical TechnologyLtd 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.