What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 investigating Fujian Dongbai (Group)Ltd (SHSE:600693), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Fujian Dongbai (Group)Ltd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = CN¥380m ÷ (CN¥14b - CN¥5.6b) (Based on the trailing twelve months to September 2023).
Thus, Fujian Dongbai (Group)Ltd has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Multiline Retail industry average of 5.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Dongbai (Group)Ltd's ROCE against it's prior returns. If you're interested in investigating Fujian Dongbai (Group)Ltd's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We weren't thrilled with the trend because Fujian Dongbai (Group)Ltd's ROCE has reduced by 59% over the last five years, while the business employed 108% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Fujian Dongbai (Group)Ltd might not have received a full period of earnings contribution from it.
Our Take On Fujian Dongbai (Group)Ltd's ROCE
To conclude, we've found that Fujian Dongbai (Group)Ltd is reinvesting in the business, but returns have been falling. Since the stock has declined 36% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Fujian Dongbai (Group)Ltd has the makings of a multi-bagger.
If you want to know some of the risks facing Fujian Dongbai (Group)Ltd we've found 4 warning signs (3 can't be ignored!) that you should be aware of before investing here.
While Fujian Dongbai (Group)Ltd 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.