If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shenzhen Tongyi Industry (SZSE:300538), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shenzhen Tongyi Industry:

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

0.031 = CN¥45m ÷ (CN¥2.1b - CN¥678m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Tongyi Industry has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.0%.

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're interested in investigating Shenzhen Tongyi Industry's past further, check out this free graph covering Shenzhen Tongyi Industry's past earnings, revenue and cash flow.

So How Is Shenzhen Tongyi Industry's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Tongyi Industry, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 3.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shenzhen Tongyi Industry has decreased its current liabilities to 32% 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.

The Bottom Line On Shenzhen Tongyi Industry's ROCE

In summary, Shenzhen Tongyi Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last five years. Therefore based on the analysis done in this article, we don't think Shenzhen Tongyi Industry has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Shenzhen Tongyi Industry (including 1 which doesn't sit too well with us) .

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.