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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shenzhen SEICHI Technologies (SHSE:688627) so let's look a bit deeper.
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 SEICHI Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥86m ÷ (CN¥1.9b - CN¥206m) (Based on the trailing twelve months to September 2024).
So, Shenzhen SEICHI Technologies has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.5%.
Above you can see how the current ROCE for Shenzhen SEICHI Technologies 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 SEICHI Technologies .
So How Is Shenzhen SEICHI Technologies' ROCE Trending?
Shenzhen SEICHI Technologies has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.0% which is a sight for sore eyes. Not only that, but the company is utilizing 1,574% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 11%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On Shenzhen SEICHI Technologies' ROCE
To the delight of most shareholders, Shenzhen SEICHI Technologies has now broken into profitability. Given the stock has declined 10% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shenzhen SEICHI Technologies (of which 1 doesn't sit too well with us!) that you should know about.
While Shenzhen SEICHI Technologies 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.
