Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shenzhen Rapoo Technology (SZSE:002577) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shenzhen Rapoo Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.003 = CN¥3.5m ÷ (CN¥1.2b - CN¥69m) (Based on the trailing twelve months to September 2023).
So, Shenzhen Rapoo Technology has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 6.4%.
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'd like to look at how Shenzhen Rapoo Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Rapoo Technology's past earnings, revenue and cash flow.
What Does the ROCE Trend For Shenzhen Rapoo Technology Tell Us?
Shareholders will be relieved that Shenzhen Rapoo Technology has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.3%, which is always encouraging. While returns have increased, the amount of capital employed by Shenzhen Rapoo Technology has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
What We Can Learn From Shenzhen Rapoo Technology's ROCE
In summary, we're delighted to see that Shenzhen Rapoo Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 6.6% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One more thing to note, we've identified 2 warning signs with Shenzhen Rapoo Technology and understanding these should be part of your investment process.
While Shenzhen Rapoo Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.