If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shenzhen Energy Group (SZSE:000027), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Shenzhen Energy Group:

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

0.053 = CN¥6.7b ÷ (CN¥162b - CN¥36b) (Based on the trailing twelve months to March 2024).

Thus, Shenzhen Energy Group has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.9% average generated by the Renewable Energy industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Energy Group's ROCE against it's prior returns. If you'd like to look at how Shenzhen Energy Group has performed in the past in other metrics, you can view this free graph of Shenzhen Energy Group's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Energy Group's ROCE Trend?

The returns on capital haven't changed much for Shenzhen Energy Group in recent years. Over the past five years, ROCE has remained relatively flat at around 5.3% and the business has deployed 90% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Shenzhen Energy Group's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 62% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with Shenzhen Energy Group (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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.

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