To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shenzhen Pagoda Industrial (Group) (HKG:2411), it didn't seem to tick all of these boxes.

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 Pagoda Industrial (Group):

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

0.055 = CN¥221m ÷ (CN¥8.6b - CN¥4.5b) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen Pagoda Industrial (Group) has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 7.3%.

Above you can see how the current ROCE for Shenzhen Pagoda Industrial (Group) 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 Pagoda Industrial (Group) .

What Can We Tell From Shenzhen Pagoda Industrial (Group)'s ROCE Trend?

In terms of Shenzhen Pagoda Industrial (Group)'s historical ROCE trend, it doesn't exactly demand attention. Over the past four years, ROCE has remained relatively flat at around 5.5% and the business has deployed 42% more capital into its operations. 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.

Another point to note, we noticed the company has increased current liabilities over the last four years. This is intriguing because if current liabilities hadn't increased to 53% of total assets, this reported ROCE would probably be less than5.5% because total capital employed would be higher.The 5.5% ROCE could be even lower if current liabilities weren't 53% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

Our Take On Shenzhen Pagoda Industrial (Group)'s ROCE

Long story short, while Shenzhen Pagoda Industrial (Group) has been reinvesting its capital, the returns that it's generating haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 79% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 3 warning signs for Shenzhen Pagoda Industrial (Group) you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.