If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Shenzhen Phoenix Telecom TechnologyLtd (SZSE:301191), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Shenzhen Phoenix Telecom TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = CN¥141m ÷ (CN¥2.3b - CN¥561m) (Based on the trailing twelve months to September 2023).
Therefore, Shenzhen Phoenix Telecom TechnologyLtd has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 5.2%.
Above you can see how the current ROCE for Shenzhen Phoenix Telecom TechnologyLtd 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 Shenzhen Phoenix Telecom TechnologyLtd.
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Shenzhen Phoenix Telecom TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 8.1% and the business has deployed 859% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 24% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
In summary, Shenzhen Phoenix Telecom TechnologyLtd has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Shenzhen Phoenix Telecom TechnologyLtd has the makings of a multi-bagger.
Shenzhen Phoenix Telecom TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Shenzhen Phoenix Telecom TechnologyLtd that you might be interested in.
While Shenzhen Phoenix Telecom TechnologyLtd 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.