Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Shenzhen Jove Enterprise (SZSE:300814) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shenzhen Jove Enterprise is:

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

0.029 = CN¥35m ÷ (CN¥1.7b - CN¥517m) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Jove Enterprise has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.

Check out our latest analysis for Shenzhen Jove Enterprise

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

What Can We Tell From Shenzhen Jove Enterprise's ROCE Trend?

On the surface, the trend of ROCE at Shenzhen Jove Enterprise doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.9% from 20% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Shenzhen Jove Enterprise has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Shenzhen Jove Enterprise's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Jove Enterprise have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 70% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Shenzhen Jove Enterprise does have some risks though, and we've spotted 3 warning signs for Shenzhen Jove Enterprise that you might be interested in.

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.