To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shanghai Taisheng Wind Power Equipment (SZSE:300129) so let's look a bit deeper.
What Is 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. To calculate this metric for Shanghai Taisheng Wind Power Equipment, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥223m ÷ (CN¥7.6b - CN¥3.0b) (Based on the trailing twelve months to June 2023).
Therefore, Shanghai Taisheng Wind Power Equipment has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.4%.
See our latest analysis for Shanghai Taisheng Wind Power Equipment
Above you can see how the current ROCE for Shanghai Taisheng Wind Power Equipment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 102% more capital is being employed now too. So we're very much inspired by what we're seeing at Shanghai Taisheng Wind Power Equipment thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that Shanghai Taisheng Wind Power Equipment has a current liabilities to total assets ratio of 40%, 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.
The Bottom Line On Shanghai Taisheng Wind Power Equipment's ROCE
To sum it up, Shanghai Taisheng Wind Power Equipment has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 285% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 1 warning sign for Shanghai Taisheng Wind Power Equipment you'll probably want to know about.
While Shanghai Taisheng Wind Power Equipment 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.