There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Shenzhen Tellus Holding (SZSE:000025) and its trend of ROCE, we really liked what we saw.
What Is 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 Tellus Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥96m ÷ (CN¥2.4b - CN¥572m) (Based on the trailing twelve months to September 2023).
Therefore, Shenzhen Tellus Holding has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.
View our latest analysis for Shenzhen Tellus Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Tellus Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shenzhen Tellus Holding, check out these free graphs here.
What Can We Tell From Shenzhen Tellus Holding's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.2%. The amount of capital employed has increased too, by 68%. So we're very much inspired by what we're seeing at Shenzhen Tellus Holding thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that Shenzhen Tellus Holding is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 13% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Shenzhen Tellus Holding we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
While Shenzhen Tellus Holding 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.