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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Shenzhen Transsion Holdings' (SHSE:688036) trend of ROCE, we really liked what we saw.

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. To calculate this metric for Shenzhen Transsion Holdings, this is the formula:

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

0.25 = CN¥6.1b ÷ (CN¥47b - CN¥22b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Transsion Holdings has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Tech industry average of 5.4%.

In the above chart we have measured Shenzhen Transsion Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Transsion Holdings .

What Can We Tell From Shenzhen Transsion Holdings' ROCE Trend?

It's hard not to be impressed by Shenzhen Transsion Holdings' returns on capital. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 175% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Shenzhen Transsion Holdings' current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Shenzhen Transsion Holdings' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 252% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Shenzhen Transsion Holdings does have some risks though, and we've spotted 1 warning sign for Shenzhen Transsion Holdings that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.