If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating Beijing Kingsoft Office Software (SHSE:688111), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Beijing Kingsoft Office Software:

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

0.099 = CN¥1.1b ÷ (CN¥14b - CN¥3.2b) (Based on the trailing twelve months to December 2023).

Thus, Beijing Kingsoft Office Software has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Software industry average of 2.9%.

Above you can see how the current ROCE for Beijing Kingsoft Office Software compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beijing Kingsoft Office Software for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Beijing Kingsoft Office Software doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 9.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beijing Kingsoft Office Software. However, despite the promising trends, the stock has fallen 14% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Beijing Kingsoft Office Software could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688111 on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.