Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Shenzhen Senior Technology Material (SZSE:300568), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shenzhen Senior Technology Material is:

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

0.077 = CN¥453m ÷ (CN¥8.0b - CN¥2.0b) (Based on the trailing twelve months to March 2022).

Therefore, Shenzhen Senior Technology Material has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.9%.

See our latest analysis for Shenzhen Senior Technology Material

Above you can see how the current ROCE for Shenzhen Senior Technology Material compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

The returns on capital haven't changed much for Shenzhen Senior Technology Material in recent years. Over the past five years, ROCE has remained relatively flat at around 7.7% and the business has deployed 242% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

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 26% of total assets, this reported ROCE would probably be less than7.7% because total capital employed would be higher.The 7.7% ROCE could be even lower if current liabilities weren't 26% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From Shenzhen Senior Technology Material's ROCE

In summary, Shenzhen Senior Technology Material has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 205% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shenzhen Senior Technology Material (of which 1 is concerning!) that you should know about.

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.