To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Shenzhen S.C New Energy Technology (SZSE:300724) 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 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. Analysts use this formula to calculate it for Shenzhen S.C New Energy Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥1.1b ÷ (CN¥30b - CN¥21b) (Based on the trailing twelve months to June 2023).
Therefore, Shenzhen S.C New Energy Technology has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 4.1% it's much better.
Check out our latest analysis for Shenzhen S.C New Energy Technology
In the above chart we have measured Shenzhen S.C New Energy Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shenzhen S.C New Energy Technology.
What Does the ROCE Trend For Shenzhen S.C New Energy Technology Tell Us?
In terms of Shenzhen S.C New Energy Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 31%, but since then they've fallen to 14%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a separate but related note, it's important to know that Shenzhen S.C New Energy Technology has a current liabilities to total assets ratio of 72%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Shenzhen S.C New Energy Technology's ROCE
While returns have fallen for Shenzhen S.C New Energy Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 225% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
While Shenzhen S.C New Energy Technology doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.