If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Shenzhen Huaqiang Industry (SZSE:000062) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Shenzhen Huaqiang Industry, this is the formula:

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

0.11 = CN¥960m ÷ (CN¥17b - CN¥7.6b) (Based on the trailing twelve months to September 2023).

So, Shenzhen Huaqiang Industry has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.

View our latest analysis for Shenzhen Huaqiang Industry

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

What Does the ROCE Trend For Shenzhen Huaqiang Industry Tell Us?

We weren't thrilled with the trend because Shenzhen Huaqiang Industry's ROCE has reduced by 32% over the last five years, while the business employed 52% more capital. That being said, Shenzhen Huaqiang Industry raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shenzhen Huaqiang Industry's earnings and if they change as a result from the capital raise.

Another thing to note, Shenzhen Huaqiang Industry has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Huaqiang Industry have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Shenzhen Huaqiang Industry (including 1 which is a bit concerning) .

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.