If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think Shenzhen Tongyi Industry (SZSE:300538) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shenzhen Tongyi Industry, this is the formula:

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

0.03 = CN¥42m ÷ (CN¥2.2b - CN¥786m) (Based on the trailing twelve months to September 2023).

So, Shenzhen Tongyi Industry has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.5%.

See our latest analysis for Shenzhen Tongyi Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Tongyi Industry's ROCE against it's prior returns. If you'd like to look at how Shenzhen Tongyi Industry has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Tongyi Industry's ROCE Trend?

On the surface, the trend of ROCE at Shenzhen Tongyi Industry doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Shenzhen Tongyi Industry's ROCE

While returns have fallen for Shenzhen Tongyi Industry in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 89% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 3 warning signs for Shenzhen Tongyi Industry that we think you should be aware of.

While Shenzhen Tongyi Industry 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.