There are a few key trends to look for if we want to identify the next multi-bagger. 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 Shenzhen Best of Best HoldingsLtd (SZSE:001298), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Shenzhen Best of Best HoldingsLtd is:

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

0.045 = CN¥67m ÷ (CN¥2.6b - CN¥1.1b) (Based on the trailing twelve months to June 2023).

Therefore, Shenzhen Best of Best HoldingsLtd has an ROCE of 4.5%. On its own, that's a low figure but it's around the 5.0% average generated by the Electronic industry.

Check out our latest analysis for Shenzhen Best of Best HoldingsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Best of Best HoldingsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shenzhen Best of Best HoldingsLtd, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Shenzhen Best of Best HoldingsLtd, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 4.5% from 41% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Shenzhen Best of Best HoldingsLtd has decreased its current liabilities to 43% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

We're a bit apprehensive about Shenzhen Best of Best HoldingsLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 7.1% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Shenzhen Best of Best HoldingsLtd (of which 2 shouldn't be ignored!) that you should know about.

While Shenzhen Best of Best HoldingsLtd 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.