Micro-Tech (Nanjing)Ltd's (SHSE:688029) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Micro-Tech (Nanjing)Ltd (SHSE:688029) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Micro-Tech (Nanjing)Ltd:

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

0.15 = CN¥570m ÷ (CN¥4.6b - CN¥689m) (Based on the trailing twelve months to September 2024).

Thus, Micro-Tech (Nanjing)Ltd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 5.9% it's much better.

Check out our latest analysis for Micro-Tech (Nanjing)Ltd

In the above chart we have measured Micro-Tech (Nanjing)Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Micro-Tech (Nanjing)Ltd for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Micro-Tech (Nanjing)Ltd. Over the last five years, returns on capital employed have risen substantially to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 57% more capital is being employed now too. So we're very much inspired by what we're seeing at Micro-Tech (Nanjing)Ltd thanks to its ability to profitably reinvest capital.

What We Can Learn From Micro-Tech (Nanjing)Ltd's ROCE

In summary, it's great to see that Micro-Tech (Nanjing)Ltd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 1 warning sign facing Micro-Tech (Nanjing)Ltd that you might find interesting.

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.