There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Shenzhen Minglida Precision Technology's (SZSE:301268) ROCE trend, we were pretty happy with what we saw.
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. Analysts use this formula to calculate it for Shenzhen Minglida Precision Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥477m ÷ (CN¥5.7b - CN¥2.0b) (Based on the trailing twelve months to September 2023).
So, Shenzhen Minglida Precision Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.2% it's much better.
In the above chart we have measured Shenzhen Minglida Precision Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Minglida Precision Technology .
What Does the ROCE Trend For Shenzhen Minglida Precision Technology Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 432% in that time. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Shenzhen Minglida Precision Technology's ROCE
The main thing to remember is that Shenzhen Minglida Precision Technology has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 45% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
Shenzhen Minglida Precision Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.