Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at ShenzhenJingQuanHua ElectronicsLtd (SZSE:002885), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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 ShenzhenJingQuanHua ElectronicsLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥80m ÷ (CN¥2.9b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
Thus, ShenzhenJingQuanHua ElectronicsLtd has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for ShenzhenJingQuanHua ElectronicsLtd's ROCE against it's prior returns. If you're interested in investigating ShenzhenJingQuanHua ElectronicsLtd's past further, check out this free graph covering ShenzhenJingQuanHua ElectronicsLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at ShenzhenJingQuanHua ElectronicsLtd. Over the past five years, ROCE has remained relatively flat at around 4.9% and the business has deployed 86% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Another thing to note, ShenzhenJingQuanHua ElectronicsLtd has a high ratio of current liabilities to total assets of 43%. 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.
The Key Takeaway
In summary, ShenzhenJingQuanHua ElectronicsLtd has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing, we've spotted 3 warning signs facing ShenzhenJingQuanHua ElectronicsLtd that you might find interesting.
While ShenzhenJingQuanHua ElectronicsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.