Some Investors May Be Worried About Cre8 Direct (NingBo)'s (SZSE:300703) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Cre8 Direct (NingBo) (SZSE:300703), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Cre8 Direct (NingBo), this is the formula:

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

0.075 = CN¥92m ÷ (CN¥1.8b - CN¥542m) (Based on the trailing twelve months to September 2024).

Thus, Cre8 Direct (NingBo) has an ROCE of 7.5%. On its own, that's a low figure but it's around the 6.5% average generated by the Forestry industry.

See our latest analysis for Cre8 Direct (NingBo)

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 Cre8 Direct (NingBo)'s past further, check out this free graph covering Cre8 Direct (NingBo)'s past earnings, revenue and cash flow.

What Does the ROCE Trend For Cre8 Direct (NingBo) Tell Us?

On the surface, the trend of ROCE at Cre8 Direct (NingBo) doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Cre8 Direct (NingBo) is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 65% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Cre8 Direct (NingBo) we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

While Cre8 Direct (NingBo) 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.

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

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.