There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Smartsens Technology (Shanghai) (SHSE:688213) and its trend of ROCE, we really liked what we saw.
Understanding 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 Smartsens Technology (Shanghai), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = CN¥78m ÷ (CN¥6.9b - CN¥2.7b) (Based on the trailing twelve months to March 2024).
So, Smartsens Technology (Shanghai) has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 3.9%.
In the above chart we have measured Smartsens Technology (Shanghai)'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 Smartsens Technology (Shanghai) for free.
How Are Returns Trending?
Smartsens Technology (Shanghai) has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it's now earning 1.9% on its capital. Not only that, but the company is utilizing 636% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
In summary, it's great to see that Smartsens Technology (Shanghai) has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 23% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Smartsens Technology (Shanghai), you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.