If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shanghai Moons' Electric (SHSE:603728), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shanghai Moons' Electric is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = CN¥199m ÷ (CN¥3.9b - CN¥976m) (Based on the trailing twelve months to September 2023).
Therefore, Shanghai Moons' Electric has an ROCE of 6.9%. On its own, that's a low figure but it's around the 6.3% average generated by the Electrical industry.
View our latest analysis for Shanghai Moons' Electric
In the above chart we have measured Shanghai Moons' Electric'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 Shanghai Moons' Electric.
What Can We Tell From Shanghai Moons' Electric's ROCE Trend?
In terms of Shanghai Moons' Electric's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.9% from 8.9% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Shanghai Moons' Electric's ROCE
Bringing it all together, while we're somewhat encouraged by Shanghai Moons' Electric's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 446% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 1 warning sign for Shanghai Moons' Electric you'll probably want to know about.
While Shanghai Moons' Electric 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.