Yunnan Nantian Electronics InformationLtd (SZSE:000948) Has Some Way To Go To Become A Multi-Bagger

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Yunnan Nantian Electronics InformationLtd (SZSE:000948), 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Yunnan Nantian Electronics InformationLtd:

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

0.032 = CN¥106m ÷ (CN¥8.5b - CN¥5.2b) (Based on the trailing twelve months to June 2024).

Therefore, Yunnan Nantian Electronics InformationLtd has an ROCE of 3.2%. In absolute terms, that's a low return but it's around the IT industry average of 3.8%.

Check out our latest analysis for Yunnan Nantian Electronics InformationLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yunnan Nantian Electronics InformationLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Yunnan Nantian Electronics InformationLtd.

So How Is Yunnan Nantian Electronics InformationLtd's ROCE Trending?

There are better returns on capital out there than what we're seeing at Yunnan Nantian Electronics InformationLtd. Over the past five years, ROCE has remained relatively flat at around 3.2% and the business has deployed 88% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 61% of total assets, this reported ROCE would probably be less than3.2% because total capital employed would be higher.The 3.2% ROCE could be even lower if current liabilities weren't 61% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Yunnan Nantian Electronics InformationLtd's ROCE

In conclusion, Yunnan Nantian Electronics InformationLtd has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 102% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Yunnan Nantian Electronics InformationLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Yunnan Nantian Electronics InformationLtd 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.

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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.