There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Shijiazhuang Tonhe Electronics TechnologiesLtd (SZSE:300491) and its trend of ROCE, we really liked what we saw.

What Is 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 Shijiazhuang Tonhe Electronics TechnologiesLtd is:

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

0.058 = CN¥64m ÷ (CN¥1.8b - CN¥702m) (Based on the trailing twelve months to September 2023).

Thus, Shijiazhuang Tonhe Electronics TechnologiesLtd has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

See our latest analysis for Shijiazhuang Tonhe Electronics TechnologiesLtd

Above you can see how the current ROCE for Shijiazhuang Tonhe Electronics TechnologiesLtd 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 Shijiazhuang Tonhe Electronics TechnologiesLtd.

What Can We Tell From Shijiazhuang Tonhe Electronics TechnologiesLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 143%. So we're very much inspired by what we're seeing at Shijiazhuang Tonhe Electronics TechnologiesLtd thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 39% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shijiazhuang Tonhe Electronics TechnologiesLtd has. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Shijiazhuang Tonhe Electronics TechnologiesLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Shijiazhuang Tonhe Electronics TechnologiesLtd 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.