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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Universal Scientific Industrial (Shanghai)'s (SHSE:601231) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Universal Scientific Industrial (Shanghai), this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = CN¥2.2b ÷ (CN¥40b - CN¥23b) (Based on the trailing twelve months to December 2023).

Therefore, Universal Scientific Industrial (Shanghai) has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.

In the above chart we have measured Universal Scientific Industrial (Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Universal Scientific Industrial (Shanghai) here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 86% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Universal Scientific Industrial (Shanghai) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Universal Scientific Industrial (Shanghai) has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Universal Scientific Industrial (Shanghai)'s ROCE

To sum it up, Universal Scientific Industrial (Shanghai) has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 45% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Universal Scientific Industrial (Shanghai) you'll probably want to know about.

While Universal Scientific Industrial (Shanghai) 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.