If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shenzhen Pagoda Industrial (Group) (HKG:2411) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen Pagoda Industrial (Group), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = CN¥365m ÷ (CN¥7.6b - CN¥3.5b) (Based on the trailing twelve months to December 2023).
Therefore, Shenzhen Pagoda Industrial (Group) has an ROCE of 9.0%. Even though it's in line with the industry average of 8.6%, it's still a low return by itself.
In the above chart we have measured Shenzhen Pagoda Industrial (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Pagoda Industrial (Group) for free.
So How Is Shenzhen Pagoda Industrial (Group)'s ROCE Trending?
In terms of Shenzhen Pagoda Industrial (Group)'s historical ROCE trend, it doesn't exactly demand attention. Over the past four years, ROCE has remained relatively flat at around 9.0% and the business has deployed 48% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Shenzhen Pagoda Industrial (Group)'s current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Shenzhen Pagoda Industrial (Group)'s ROCE
In summary, Shenzhen Pagoda Industrial (Group) has simply been reinvesting capital and generating the same low rate of return as before. And investors appear hesitant that the trends will pick up because the stock has fallen 45% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you're still interested in Shenzhen Pagoda Industrial (Group) it's worth checking out our FREE intrinsic value approximation for 2411 to see if it's trading at an attractive price in other respects.
While Shenzhen Pagoda Industrial (Group) 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.