There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Shenzhen Envicool Technology (SZSE:002837) so let's look a bit deeper.
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 Envicool Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥492m ÷ (CN¥5.1b - CN¥2.4b) (Based on the trailing twelve months to March 2024).
Therefore, Shenzhen Envicool Technology has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.3% it's much better.
In the above chart we have measured Shenzhen Envicool Technology'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 Envicool Technology for free.
So How Is Shenzhen Envicool Technology's ROCE Trending?
The trends we've noticed at Shenzhen Envicool Technology are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 141% more capital is being employed now too. 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.
On a separate but related note, it's important to know that Shenzhen Envicool Technology has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
To sum it up, Shenzhen Envicool Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 463% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Shenzhen Envicool Technology can keep these trends up, it could have a bright future ahead.
While Shenzhen Envicool Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002837 helps visualize whether it is currently trading for a fair price.
While Shenzhen Envicool 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.
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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.