If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Shanghai Belling (SHSE:600171) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Shanghai Belling, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = CN¥142m ÷ (CN¥4.7b - CN¥569m) (Based on the trailing twelve months to September 2023).
So, Shanghai Belling has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Belling's ROCE against it's prior returns. If you'd like to look at how Shanghai Belling has performed in the past in other metrics, you can view this free graph of Shanghai Belling's past earnings, revenue and cash flow.
The Trend Of ROCE
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 3.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shanghai Belling has. Astute investors may have an opportunity here because the stock has declined 14% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Shanghai Belling, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.