If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Shenzhen Longood Intelligent ElectricLTD (SZSE:300543), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Longood Intelligent ElectricLTD:

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

0.025 = CN¥37m ÷ (CN¥2.0b - CN¥541m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Longood Intelligent ElectricLTD has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shenzhen Longood Intelligent ElectricLTD, we didn't gain much confidence. Around five years ago the returns on capital were 8.6%, but since then they've fallen to 2.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Shenzhen Longood Intelligent ElectricLTD's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Shenzhen Longood Intelligent ElectricLTD have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with Shenzhen Longood Intelligent ElectricLTD and understanding them should be part of your investment process.

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.