What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shenzhen Tellus Holding's (SZSE:000025) returns on capital, so let's have a look.
Understanding 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 Shenzhen Tellus Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥96m ÷ (CN¥2.4b - CN¥572m) (Based on the trailing twelve months to September 2023).
Therefore, Shenzhen Tellus Holding has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.
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 Tellus Holding has performed in the past in other metrics, you can view this free graph of Shenzhen Tellus Holding's past earnings, revenue and cash flow.
What Does the ROCE Trend For Shenzhen Tellus Holding Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 68% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
All in all, it's terrific to see that Shenzhen Tellus Holding is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 34% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing Shenzhen Tellus Holding we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.
While Shenzhen Tellus Holding 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.