If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shenzhen Everwin Precision Technology (SZSE:300115) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shenzhen Everwin Precision Technology is:

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

0.024 = CN¥211m ÷ (CN¥18b - CN¥9.4b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Everwin Precision Technology has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.

Check out our latest analysis for Shenzhen Everwin Precision Technology

In the above chart we have measured Shenzhen Everwin Precision Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Everwin Precision Technology here for free.

What Can We Tell From Shenzhen Everwin Precision Technology's ROCE Trend?

When we looked at the ROCE trend at Shenzhen Everwin Precision Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.8% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Another thing to note, Shenzhen Everwin Precision Technology has a high ratio of current liabilities to total assets of 51%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shenzhen Everwin Precision Technology's ROCE

In summary, Shenzhen Everwin Precision Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 64% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Shenzhen Everwin Precision Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Shenzhen Everwin Precision 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.