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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Shinva Medical InstrumentLtd (SHSE:600587), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Shinva Medical InstrumentLtd is:

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

0.08 = CN¥665m ÷ (CN¥15b - CN¥7.2b) (Based on the trailing twelve months to March 2024).

Therefore, Shinva Medical InstrumentLtd has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 6.4%.

In the above chart we have measured Shinva Medical InstrumentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shinva Medical InstrumentLtd .

How Are Returns Trending?

In terms of Shinva Medical InstrumentLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 59% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Shinva Medical InstrumentLtd has done well to reduce current liabilities to 47% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

Our Take On Shinva Medical InstrumentLtd's ROCE

As we've seen above, Shinva Medical InstrumentLtd's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 34% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Shinva Medical InstrumentLtd you'll probably want to know about.

While Shinva Medical InstrumentLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com