If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think China Leadshine Technology (SZSE:002979) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on China Leadshine Technology is:

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

0.15 = CN¥217m ÷ (CN¥2.0b - CN¥523m) (Based on the trailing twelve months to March 2022).

So, China Leadshine Technology has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Electronic industry.

See our latest analysis for China Leadshine Technology

Above you can see how the current ROCE for China Leadshine Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Leadshine Technology here for free.

How Are Returns Trending?

In terms of China Leadshine Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On China Leadshine Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for China Leadshine Technology. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

China Leadshine Technology does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While China Leadshine Technology 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.