If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So, when we ran our eye over Shenzhen Transsion Holdings' (SHSE:688036) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Transsion Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = CN¥7.4b ÷ (CN¥48b - CN¥24b) (Based on the trailing twelve months to March 2024).
Thus, Shenzhen Transsion Holdings has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Tech industry average of 5.4%.
In the above chart we have measured Shenzhen Transsion Holdings' 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 Shenzhen Transsion Holdings .
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Shenzhen Transsion Holdings' returns on capital. The company has consistently earned 31% for the last five years, and the capital employed within the business has risen 290% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Shenzhen Transsion Holdings can keep this up, we'd be very optimistic about its future.
On a separate but related note, it's important to know that Shenzhen Transsion Holdings has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. 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.
Our Take On Shenzhen Transsion Holdings' ROCE
In short, we'd argue Shenzhen Transsion Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, despite the favorable fundamentals, the stock has fallen 31% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
Like most companies, Shenzhen Transsion Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
Shenzhen Transsion Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.