There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over ShenZhen YUTO Packaging Technology's (SZSE:002831) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 YUTO Packaging Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥1.8b ÷ (CN¥21b - CN¥8.8b) (Based on the trailing twelve months to September 2023).
So, ShenZhen YUTO Packaging Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 4.4% generated by the Packaging industry.
In the above chart we have measured ShenZhen YUTO Packaging Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ShenZhen YUTO Packaging Technology .
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 88% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that ShenZhen YUTO Packaging Technology has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, ShenZhen YUTO Packaging Technology's current liabilities are still rather high at 41% of total assets. 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 YUTO Packaging Technology's ROCE
In the end, ShenZhen YUTO Packaging Technology has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 4.9% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
Like most companies, ShenZhen YUTO Packaging Technology does come with some risks, and we've found 1 warning sign that you should be aware of.
While ShenZhen YUTO Packaging 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.