If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. That's why when we briefly looked at Shenzhen Transsion Holdings' (SHSE:688036) ROCE trend, we were very happy with what we saw.

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. Analysts use this formula to calculate it for Shenzhen Transsion Holdings:

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

0.31 = CN¥7.4b ÷ (CN¥48b - CN¥24b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Transsion Holdings has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 5.3% earned by companies in a similar industry.

In the above chart we have measured Shenzhen Transsion Holdings' 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 Transsion Holdings for free.

What Can We Tell From Shenzhen Transsion Holdings' ROCE Trend?

We'd be pretty happy with returns on capital like Shenzhen Transsion Holdings. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 290% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Shenzhen Transsion Holdings can keep this up, we'd be very optimistic about its future.

On a side note, Shenzhen Transsion Holdings' current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, we'd argue Shenzhen Transsion Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last three years the stock has declined 15%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know about the risks facing Shenzhen Transsion Holdings, we've discovered 1 warning sign that you should be aware of.

Shenzhen Transsion Holdings 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.