What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Shenzhen Sunshine Laser & Electronics Technology (SZSE:300227) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Shenzhen Sunshine Laser & Electronics Technology is:

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

0.016 = CN¥31m ÷ (CN¥2.8b - CN¥932m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Sunshine Laser & Electronics Technology has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

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

How Are Returns Trending?

In terms of Shenzhen Sunshine Laser & Electronics Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.6% from 5.9% five years ago. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

To conclude, we've found that Shenzhen Sunshine Laser & Electronics Technology is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Shenzhen Sunshine Laser & Electronics Technology (including 2 which make us uncomfortable) .

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.