If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shenzhen Strongteam Decoration Engineering (SZSE:002989), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Strongteam Decoration Engineering is:

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

0.027 = CN¥60m ÷ (CN¥3.2b - CN¥956m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Strongteam Decoration Engineering has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.8%.

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

So How Is Shenzhen Strongteam Decoration Engineering's ROCE Trending?

On the surface, the trend of ROCE at Shenzhen Strongteam Decoration Engineering doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 2.7%. 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 Strongteam Decoration Engineering 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

We're a bit apprehensive about Shenzhen Strongteam Decoration Engineering because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Shenzhen Strongteam Decoration Engineering, we've spotted 4 warning signs, and 1 of them is a bit concerning.

While Shenzhen Strongteam Decoration Engineering 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.