If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. 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 Changhong Technology (SZSE:300151) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen Changhong Technology, this is the formula:

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

0.0037 = CN¥8.4m ÷ (CN¥2.6b - CN¥267m) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Changhong Technology has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

In the above chart we have measured Shenzhen Changhong 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 Changhong Technology for free.

What Does the ROCE Trend For Shenzhen Changhong Technology Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 4.7% five years ago, while the business's capital employed increased by 153%. That being said, Shenzhen Changhong Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen Changhong Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

We're a bit apprehensive about Shenzhen Changhong Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 176% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Shenzhen Changhong Technology does come with some risks, and we've found 3 warning signs that you should be aware of.

While Shenzhen Changhong 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.

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