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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Shenzhen Newway Photomask Making (SHSE:688401) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Shenzhen Newway Photomask Making, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CN¥136m ÷ (CN¥2.1b - CN¥170m) (Based on the trailing twelve months to September 2023).
Therefore, Shenzhen Newway Photomask Making has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.0% generated by the Electronic industry, it's much better.
Check out our latest analysis for Shenzhen Newway Photomask Making
Above you can see how the current ROCE for Shenzhen Newway Photomask Making 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.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.2%. The amount of capital employed has increased too, by 445%. So we're very much inspired by what we're seeing at Shenzhen Newway Photomask Making thanks to its ability to profitably reinvest capital.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 8.2%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Shenzhen Newway Photomask Making has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shenzhen Newway Photomask Making has. Given the stock has declined 15% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Shenzhen Newway Photomask Making does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...
While Shenzhen Newway Photomask Making 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.