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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at SBT Ultrasonic TechnologyLtd (SHSE:688392), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on SBT Ultrasonic TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CN¥61m ÷ (CN¥2.1b - CN¥371m) (Based on the trailing twelve months to December 2023).
Therefore, SBT Ultrasonic TechnologyLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.
Above you can see how the current ROCE for SBT Ultrasonic TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for SBT Ultrasonic TechnologyLtd .
The Trend Of ROCE
On the surface, the trend of ROCE at SBT Ultrasonic TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 5.0% over the last four years. However it looks like SBT Ultrasonic TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by SBT Ultrasonic TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One more thing, we've spotted 2 warning signs facing SBT Ultrasonic TechnologyLtd that you might find interesting.
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.