Returns On Capital Signal Tricky Times Ahead For Nanjing Railway New TechnologyLtd (SZSE:301016)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Nanjing Railway New TechnologyLtd (SZSE:301016), 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 Nanjing Railway New TechnologyLtd, this is the formula:

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

0.055 = CN¥57m ÷ (CN¥1.2b - CN¥176m) (Based on the trailing twelve months to September 2024).

Therefore, Nanjing Railway New TechnologyLtd has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

See our latest analysis for Nanjing Railway New TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Nanjing Railway New TechnologyLtd has performed in the past in other metrics, you can view this free graph of Nanjing Railway New TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Nanjing Railway New TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 32% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Nanjing Railway New TechnologyLtd has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Nanjing Railway New TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 17% over the last three years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Nanjing Railway New TechnologyLtd we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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.