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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shenzhen Urban Transport Planning Center (SZSE:301091) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Urban Transport Planning Center, this is the formula:

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

0.031 = CN¥70m ÷ (CN¥3.0b - CN¥685m) (Based on the trailing twelve months to June 2023).

Therefore, Shenzhen Urban Transport Planning Center has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 5.1%.

See our latest analysis for Shenzhen Urban Transport Planning Center

In the above chart we have measured Shenzhen Urban Transport Planning Center's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Urban Transport Planning Center here for free.

What Can We Tell From Shenzhen Urban Transport Planning Center's ROCE Trend?

On the surface, the trend of ROCE at Shenzhen Urban Transport Planning Center doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 3.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shenzhen Urban Transport Planning Center has decreased its current liabilities to 23% 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. 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.

The Bottom Line On Shenzhen Urban Transport Planning Center's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Urban Transport Planning Center. And the stock has followed suit returning a meaningful 57% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Shenzhen Urban Transport Planning Center (1 is concerning) you should be aware of.

While Shenzhen Urban Transport Planning Center may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.