If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shenzhen Kinwong Electronic (SHSE:603228) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shenzhen Kinwong Electronic is:

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

0.086 = CN¥1.0b ÷ (CN¥17b - CN¥4.4b) (Based on the trailing twelve months to June 2023).

So, Shenzhen Kinwong Electronic has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.3% generated by the Electronic industry, it's much better.

View our latest analysis for Shenzhen Kinwong Electronic

Above you can see how the current ROCE for Shenzhen Kinwong Electronic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shenzhen Kinwong Electronic.

How Are Returns Trending?

In terms of Shenzhen Kinwong Electronic's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 8.6%. However it looks like Shenzhen Kinwong Electronic might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On Shenzhen Kinwong Electronic's ROCE

In summary, Shenzhen Kinwong Electronic is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shenzhen Kinwong Electronic has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Shenzhen Kinwong Electronic that we think you should be aware of.

While Shenzhen Kinwong Electronic 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.