The Returns On Capital At Newonder Special ElectricLtd (SZSE:301120) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Newonder Special ElectricLtd (SZSE:301120), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Newonder Special ElectricLtd, this is the formula:

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

0.044 = CN¥70m ÷ (CN¥1.7b - CN¥70m) (Based on the trailing twelve months to September 2023).

So, Newonder Special ElectricLtd has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.5%.

Check out our latest analysis for Newonder Special ElectricLtd

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're interested in investigating Newonder Special ElectricLtd's past further, check out this free graph covering Newonder Special ElectricLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Newonder Special ElectricLtd doesn't inspire confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 4.4%. However it looks like Newonder Special ElectricLtd 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Newonder Special ElectricLtd has decreased its current liabilities to 4.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Newonder Special ElectricLtd's ROCE

To conclude, we've found that Newonder Special ElectricLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 37% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing, we've spotted 1 warning sign facing Newonder Special ElectricLtd that you might find interesting.

While Newonder Special ElectricLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.