What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shenzhen New Industries Biomedical Engineering (SZSE:300832), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Shenzhen New Industries Biomedical Engineering:

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

0.22 = CN¥1.8b ÷ (CN¥8.6b - CN¥526m) (Based on the trailing twelve months to March 2024).

So, Shenzhen New Industries Biomedical Engineering has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 6.3% earned by companies in a similar industry.

Above you can see how the current ROCE for Shenzhen New Industries Biomedical Engineering 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 analyst report for Shenzhen New Industries Biomedical Engineering .

What Does the ROCE Trend For Shenzhen New Industries Biomedical Engineering Tell Us?

When we looked at the ROCE trend at Shenzhen New Industries Biomedical Engineering, we didn't gain much confidence. Historically returns on capital were even higher at 29%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Shenzhen New Industries Biomedical Engineering's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen New Industries Biomedical Engineering is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 19% gain to shareholders who've held over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 1 warning sign for Shenzhen New Industries Biomedical Engineering that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com