If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Shenzhen Techwinsemi Technology (SZSE:001309) looks great, so lets see what the trend can tell us.

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

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 Techwinsemi Technology is:

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

0.32 = CN¥636m ÷ (CN¥4.9b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen Techwinsemi Technology has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 4.3% earned by companies in a similar industry.

In the above chart we have measured Shenzhen Techwinsemi Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Techwinsemi Technology .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Shenzhen Techwinsemi Technology. Over the last five years, returns on capital employed have risen substantially to 32%. 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 782%. 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.

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. Effectively this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

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 Shenzhen Techwinsemi Technology has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 14% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 2 warning signs for Shenzhen Techwinsemi Technology you'll probably want to know about.

Shenzhen Techwinsemi Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.