There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai Jahwa United (SHSE:600315), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Jahwa United, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = CN¥591m ÷ (CN¥12b - CN¥3.7b) (Based on the trailing twelve months to June 2023).
Therefore, Shanghai Jahwa United has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.3%.
See our latest analysis for Shanghai Jahwa United
In the above chart we have measured Shanghai Jahwa United's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Jahwa United.
What Can We Tell From Shanghai Jahwa United's ROCE Trend?
The returns on capital haven't changed much for Shanghai Jahwa United in recent years. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 6.7%. 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.
What We Can Learn From Shanghai Jahwa United's ROCE
In conclusion, Shanghai Jahwa United has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 4.4% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing to note, we've identified 1 warning sign with Shanghai Jahwa United and understanding it should be part of your investment process.
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.