To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Shenzhen Injoinic TechnologyLtd (SHSE:688209), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Shenzhen Injoinic TechnologyLtd is:

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

0.022 = CN¥40m ÷ (CN¥2.0b - CN¥108m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Injoinic TechnologyLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.3%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Injoinic TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Injoinic TechnologyLtd.

So How Is Shenzhen Injoinic TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Injoinic TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shenzhen Injoinic TechnologyLtd has decreased its current liabilities to 5.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Injoinic TechnologyLtd. These growth trends haven't led to growth returns though, since the stock has fallen 28% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 2 warning signs for Shenzhen Injoinic TechnologyLtd you'll probably want to know about.

While Shenzhen Injoinic TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.