The Returns On Capital At Nanjing Quanxin Cable Technology (SZSE:300447) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Nanjing Quanxin Cable Technology (SZSE:300447) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Nanjing Quanxin Cable Technology:

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

0.053 = CN¥109m ÷ (CN¥2.7b - CN¥680m) (Based on the trailing twelve months to March 2024).

Therefore, Nanjing Quanxin Cable Technology has an ROCE of 5.3%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.3%.

See our latest analysis for Nanjing Quanxin Cable Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Quanxin Cable Technology's ROCE against it's prior returns. If you'd like to look at how Nanjing Quanxin Cable Technology has performed in the past in other metrics, you can view this free graph of Nanjing Quanxin Cable Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Nanjing Quanxin Cable Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Nanjing Quanxin Cable Technology's ROCE

In summary, we're somewhat concerned by Nanjing Quanxin Cable Technology's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 6.2% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Nanjing Quanxin Cable Technology you'll probably want to know about.

While Nanjing Quanxin Cable Technology 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.

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