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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Shenzhen Best of Best HoldingsLtd (SZSE:001298) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. The formula for this calculation on Shenzhen Best of Best HoldingsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = CN¥110m ÷ (CN¥2.7b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
Thus, Shenzhen Best of Best HoldingsLtd has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.3% generated by the Electronic industry, it's much better.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shenzhen Best of Best HoldingsLtd's past further, check out this free graph covering Shenzhen Best of Best HoldingsLtd's past earnings, revenue and cash flow.
So How Is Shenzhen Best of Best HoldingsLtd's ROCE Trending?
In terms of Shenzhen Best of Best HoldingsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 33% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Shenzhen Best of Best HoldingsLtd has done well to pay down its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line On Shenzhen Best of Best HoldingsLtd's ROCE
In summary, we're somewhat concerned by Shenzhen Best of Best HoldingsLtd's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 2.7% in the last year. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with Shenzhen Best of Best HoldingsLtd (including 1 which is a bit unpleasant) .
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.