Investors Could Be Concerned With Qingmu Digital TechnologyLtd's (SZSE:301110) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Qingmu Digital TechnologyLtd (SZSE:301110), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Qingmu Digital TechnologyLtd:

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

0.038 = CN¥55m ÷ (CN¥1.6b - CN¥105m) (Based on the trailing twelve months to June 2023).

Thus, Qingmu Digital TechnologyLtd has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.6%.

See our latest analysis for Qingmu Digital 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're interested in investigating Qingmu Digital TechnologyLtd's past further, check out this free graph covering Qingmu Digital TechnologyLtd's past earnings, revenue and cash flow.

So How Is Qingmu Digital TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Qingmu Digital TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. However it looks like Qingmu Digital TechnologyLtd 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, Qingmu Digital TechnologyLtd has decreased its current liabilities to 6.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From Qingmu Digital TechnologyLtd's ROCE

To conclude, we've found that Qingmu Digital TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Qingmu Digital TechnologyLtd, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Qingmu Digital TechnologyLtd 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.