Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shenzhen Laibao Hi-Tech (SZSE:002106), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Shenzhen Laibao Hi-Tech, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CN¥192m ÷ (CN¥6.7b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
Therefore, Shenzhen Laibao Hi-Tech has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.
See our latest analysis for Shenzhen Laibao Hi-Tech
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Laibao Hi-Tech's ROCE against it's prior returns. If you're interested in investigating Shenzhen Laibao Hi-Tech's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Shenzhen Laibao Hi-Tech Tell Us?
In terms of Shenzhen Laibao Hi-Tech's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.7% over the last five years. 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.
The Key Takeaway
In summary, we're somewhat concerned by Shenzhen Laibao Hi-Tech's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 79% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you want to continue researching Shenzhen Laibao Hi-Tech, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Shenzhen Laibao Hi-Tech 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.
