To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Shanghai Yaoji Technology's (SZSE:002605) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai Yaoji Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = CN¥911m ÷ (CN¥4.6b - CN¥1.2b) (Based on the trailing twelve months to September 2023).
Thus, Shanghai Yaoji Technology has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.
Check out our latest analysis for Shanghai Yaoji Technology
Above you can see how the current ROCE for Shanghai Yaoji Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Yaoji Technology.
The Trend Of ROCE
Shanghai Yaoji Technology is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 27%. The amount of capital employed has increased too, by 100%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
All in all, it's terrific to see that Shanghai Yaoji Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 258% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 2 warning signs with Shanghai Yaoji Technology and understanding them should be part of your investment process.
Shanghai Yaoji Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
