If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shenzhen RongDa Photosensitive Science & Technology (SZSE:300576) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for Shenzhen RongDa Photosensitive Science & Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥74m ÷ (CN¥1.6b - CN¥337m) (Based on the trailing twelve months to June 2023).
So, Shenzhen RongDa Photosensitive Science & Technology has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.
See our latest analysis for Shenzhen RongDa Photosensitive Science & Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen RongDa Photosensitive Science & Technology's ROCE against it's prior returns. If you'd like to look at how Shenzhen RongDa Photosensitive Science & Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Shenzhen RongDa Photosensitive Science & Technology's ROCE Trending?
We weren't thrilled with the trend because Shenzhen RongDa Photosensitive Science & Technology's ROCE has reduced by 21% over the last five years, while the business employed 200% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Shenzhen RongDa Photosensitive Science & Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
In Conclusion...
In summary, Shenzhen RongDa Photosensitive Science & Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 578% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to know some of the risks facing Shenzhen RongDa Photosensitive Science & Technology we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
While Shenzhen RongDa Photosensitive Science & 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.