Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Shenzhen Qingyi Photomask (SHSE:688138) so let's look a bit deeper.

What Is 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 Qingyi Photomask:

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

0.10 = CN¥174m ÷ (CN¥2.5b - CN¥838m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Qingyi Photomask has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.4% it's much better.

Above you can see how the current ROCE for Shenzhen Qingyi Photomask compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Qingyi Photomask .

How Are Returns Trending?

The trends we've noticed at Shenzhen Qingyi Photomask are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 10%. The amount of capital employed has increased too, by 100%. So we're very much inspired by what we're seeing at Shenzhen Qingyi Photomask thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 33% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Shenzhen Qingyi Photomask's ROCE

In summary, it's great to see that Shenzhen Qingyi Photomask can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 24% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Shenzhen Qingyi Photomask can keep these trends up, it could have a bright future ahead.

Shenzhen Qingyi Photomask does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Shenzhen Qingyi Photomask 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.