There are a few key trends to look for if we want to identify the next 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. Having said that, from a first glance at Shenyu Communication Technology (SZSE:300563) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Shenyu Communication Technology, this is the formula:

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

0.045 = CN¥48m ÷ (CN¥1.3b - CN¥223m) (Based on the trailing twelve months to March 2024).

Therefore, Shenyu Communication Technology has an ROCE of 4.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenyu Communication Technology's ROCE against it's prior returns. If you're interested in investigating Shenyu Communication Technology's past further, check out this free graph covering Shenyu Communication Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shenyu Communication Technology, we didn't gain much confidence. Around five years ago the returns on capital were 9.5%, but since then they've fallen to 4.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shenyu Communication Technology is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 164% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 1 warning sign facing Shenyu Communication Technology that you might find interesting.

While Shenyu Communication 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com