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. However, after investigating Shanghai New Centurion Network Information Technology (SHSE:605398), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shanghai New Centurion Network Information Technology, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = CN¥37m ÷ (CN¥1.2b - CN¥163m) (Based on the trailing twelve months to June 2023).

So, Shanghai New Centurion Network Information Technology has an ROCE of 3.6%. Even though it's in line with the industry average of 3.9%, it's still a low return by itself.

See our latest analysis for Shanghai New Centurion Network Information Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai New Centurion Network Information Technology's ROCE against it's prior returns. If you're interested in investigating Shanghai New Centurion Network Information Technology's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Shanghai New Centurion Network Information Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 30%, but since then they've fallen to 3.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shanghai New Centurion Network Information Technology has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Shanghai New Centurion Network Information Technology's ROCE

To conclude, we've found that Shanghai New Centurion Network Information Technology is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 100% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Shanghai New Centurion Network Information Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.