Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Shenzhen Minglida Precision Technology's (SZSE:301268) ROCE trend, we were pretty happy with 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 Minglida Precision Technology, this is the formula:

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

0.13 = CN¥477m ÷ (CN¥5.7b - CN¥2.0b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Minglida Precision Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.2% it's much better.

View our latest analysis for Shenzhen Minglida Precision Technology

Above you can see how the current ROCE for Shenzhen Minglida Precision Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Minglida Precision Technology here for free.

What Can We Tell From Shenzhen Minglida Precision Technology's ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 432% more capital in the last five years, and the returns on that capital have remained stable at 13%. 13% is a pretty standard return, and it provides some comfort knowing that Shenzhen Minglida Precision Technology has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

The main thing to remember is that Shenzhen Minglida Precision Technology has proven its ability to continually reinvest at respectable rates of return. Yet over the last year the stock has declined 41%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we found 3 warning signs for Shenzhen Minglida Precision Technology (1 doesn't sit too well with us) you should be aware of.

While Shenzhen Minglida Precision Technology 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.