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. 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. However, after investigating ShenZhen QiangRui Precision Technology (SZSE:301128), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for ShenZhen QiangRui Precision Technology:

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

0.053 = CN¥50m ÷ (CN¥1.3b - CN¥301m) (Based on the trailing twelve months to March 2024).

So, ShenZhen QiangRui Precision Technology has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.8%.

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

What The Trend Of ROCE Can Tell Us

In terms of ShenZhen QiangRui Precision Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, ShenZhen QiangRui Precision Technology has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ShenZhen QiangRui Precision Technology. And the stock has followed suit returning a meaningful 13% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 4 warning signs with ShenZhen QiangRui Precision Technology (at least 3 which shouldn't be ignored) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.