Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Shenzhen Laibao Hi-Tech (SZSE:002106) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Shenzhen Laibao Hi-Tech:

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

0.052 = CN¥370m ÷ (CN¥8.3b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Laibao Hi-Tech has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Laibao Hi-Tech.

What Does the ROCE Trend For Shenzhen Laibao Hi-Tech Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 76% more capital is being employed now too. So we're very much inspired by what we're seeing at Shenzhen Laibao Hi-Tech thanks to its ability to profitably reinvest capital.

The Bottom Line On Shenzhen Laibao Hi-Tech's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shenzhen Laibao Hi-Tech has. Since the stock has returned a solid 54% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Shenzhen Laibao Hi-Tech and understanding it should be part of your investment process.

While Shenzhen Laibao Hi-Tech 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.