To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Shenzhen SEICHI Technologies (SHSE:688627) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Shenzhen SEICHI Technologies:

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

0.042 = CN¥73m ÷ (CN¥1.9b - CN¥232m) (Based on the trailing twelve months to March 2024).

So, Shenzhen SEICHI Technologies has an ROCE of 4.2%. On its own, that's a low figure but it's around the 5.2% average generated by the Electronic industry.

Above you can see how the current ROCE for Shenzhen SEICHI Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen SEICHI Technologies .

What Does the ROCE Trend For Shenzhen SEICHI Technologies Tell Us?

The fact that Shenzhen SEICHI Technologies is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.2% on its capital. In addition to that, Shenzhen SEICHI Technologies is employing 1,719% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Shenzhen SEICHI Technologies has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Shenzhen SEICHI Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Overall, Shenzhen SEICHI Technologies gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 42% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Shenzhen SEICHI Technologies, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Shenzhen SEICHI Technologies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com