There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shenzhen Laibao Hi-Tech (SZSE:002106), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen Laibao Hi-Tech:

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

0.044 = CN¥356m ÷ (CN¥9.3b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Laibao Hi-Tech has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Laibao Hi-Tech's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Laibao Hi-Tech.

So How Is Shenzhen Laibao Hi-Tech's ROCE Trending?

The returns on capital haven't changed much for Shenzhen Laibao Hi-Tech in recent years. Over the past five years, ROCE has remained relatively flat at around 4.4% and the business has deployed 94% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Shenzhen Laibao Hi-Tech's ROCE

As we've seen above, Shenzhen Laibao Hi-Tech's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Shenzhen Laibao Hi-Tech that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.