What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Shanghai Supezet Engineering Technology (SHSE:688121) 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)?

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. Analysts use this formula to calculate it for Shanghai Supezet Engineering Technology:

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

0.073 = CN¥317m ÷ (CN¥7.6b - CN¥3.3b) (Based on the trailing twelve months to December 2023).

Therefore, Shanghai Supezet Engineering Technology has an ROCE of 7.3%. On its own, that's a low figure but it's around the 6.1% average generated by the Machinery industry.

In the above chart we have measured Shanghai Supezet Engineering Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Supezet Engineering Technology .

What Can We Tell From Shanghai Supezet Engineering Technology's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 1,231%. Usually this isn't ideal, but given Shanghai Supezet Engineering Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shanghai Supezet Engineering Technology's earnings and if they change as a result from the capital raise.

On a related note, Shanghai Supezet Engineering Technology has decreased its current liabilities to 43% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Shanghai Supezet Engineering Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Supezet Engineering Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 5 warning signs for Shanghai Supezet Engineering Technology (2 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.