If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Shanghai Moons' Electric (SHSE:603728), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shanghai Moons' Electric is:

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

0.03 = CN¥90m ÷ (CN¥4.0b - CN¥976m) (Based on the trailing twelve months to September 2024).

So, Shanghai Moons' Electric has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

In the above chart we have measured Shanghai Moons' Electric's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Moons' Electric for free.

How Are Returns Trending?

In terms of Shanghai Moons' Electric's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 3.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Shanghai Moons' Electric's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 452% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Shanghai Moons' Electric does have some risks though, and we've spotted 2 warning signs for Shanghai Moons' Electric that you might be interested in.

While Shanghai Moons' Electric may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.