To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shenzhen Desay Battery Technology (SZSE:000049) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Shenzhen Desay Battery Technology is:

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

0.058 = CN¥560m ÷ (CN¥17b - CN¥6.9b) (Based on the trailing twelve months to December 2023).

So, Shenzhen Desay Battery Technology has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

Above you can see how the current ROCE for Shenzhen Desay Battery Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Desay Battery Technology .

How Are Returns Trending?

We weren't thrilled with the trend because Shenzhen Desay Battery Technology's ROCE has reduced by 81% over the last five years, while the business employed 284% more capital. Usually this isn't ideal, but given Shenzhen Desay Battery 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. Shenzhen Desay Battery 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.

On a related note, Shenzhen Desay Battery Technology has decreased its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Shenzhen Desay Battery Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Desay Battery Technology's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 8.8% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 3 warning signs for Shenzhen Desay Battery Technology you'll probably want to know about.

While Shenzhen Desay Battery 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.