Xi'an NovaStar Tech (SZSE:301589) Has More To Do To Multiply In Value Going Forward

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Xi'an NovaStar Tech (SZSE:301589) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Xi'an NovaStar Tech is:

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

0.18 = CN¥707m ÷ (CN¥5.2b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

So, Xi'an NovaStar Tech has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.8% it's much better.

View our latest analysis for Xi'an NovaStar Tech

In the above chart we have measured Xi'an NovaStar Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xi'an NovaStar Tech .

What Does the ROCE Trend For Xi'an NovaStar Tech Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last four years, and the capital employed within the business has risen 361% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Xi'an NovaStar Tech's ROCE

In the end, Xi'an NovaStar Tech has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 33% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One final note, you should learn about the 2 warning signs we've spotted with Xi'an NovaStar Tech (including 1 which is significant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.