Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Ningbo Ronbay New Energy TechnologyLtd (SHSE:688005), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Ningbo Ronbay New Energy TechnologyLtd is:

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

0.022 = CN¥348m ÷ (CN¥24b - CN¥8.3b) (Based on the trailing twelve months to March 2024).

Thus, Ningbo Ronbay New Energy TechnologyLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

See our latest analysis for Ningbo Ronbay New Energy TechnologyLtd

In the above chart we have measured Ningbo Ronbay New Energy TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ningbo Ronbay New Energy TechnologyLtd .

So How Is Ningbo Ronbay New Energy TechnologyLtd's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 7.0% five years ago, while the business's capital employed increased by 385%. That being said, Ningbo Ronbay New Energy TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Ningbo Ronbay New Energy TechnologyLtd's earnings and if they change as a result from the capital raise.

The Bottom Line

In summary, we're somewhat concerned by Ningbo Ronbay New Energy TechnologyLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 53% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 4 warning signs for Ningbo Ronbay New Energy TechnologyLtd that we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com