Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Shenzhen Highpower Technology (SZSE:001283), we don't think it's current trends fit the mold of a multi-bagger.

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 Highpower Technology:

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

0.039 = CN¥115m ÷ (CN¥5.6b - CN¥2.7b) (Based on the trailing twelve months to June 2023).

Therefore, Shenzhen Highpower Technology has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.

View our latest analysis for Shenzhen Highpower Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Highpower Technology's ROCE against it's prior returns. If you're interested in investigating Shenzhen Highpower Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Highpower Technology Tell Us?

On the surface, the trend of ROCE at Shenzhen Highpower Technology doesn't inspire confidence. Around four years ago the returns on capital were 24%, but since then they've fallen to 3.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shenzhen Highpower Technology has decreased its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Shenzhen Highpower Technology's ROCE

To conclude, we've found that Shenzhen Highpower Technology is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last year has been flat. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shenzhen Highpower Technology (of which 1 is a bit concerning!) that you should know about.

While Shenzhen Highpower Technology 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.