If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Guangdong Shenling Environmental Systems (SZSE:301018), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Guangdong Shenling Environmental Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CN¥203m ÷ (CN¥4.8b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
Therefore, Guangdong Shenling Environmental Systems has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.
See our latest analysis for Guangdong Shenling Environmental Systems
Above you can see how the current ROCE for Guangdong Shenling Environmental Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Guangdong Shenling Environmental Systems.
What The Trend Of ROCE Can Tell Us
In terms of Guangdong Shenling Environmental Systems' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.1%. However it looks like Guangdong Shenling Environmental Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 Key Takeaway
To conclude, we've found that Guangdong Shenling Environmental Systems is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a separate note, we've found 3 warning signs for Guangdong Shenling Environmental Systems you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.