To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Shenglan Technology (SZSE:300843) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Shenglan Technology is:

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

0.042 = CN¥65m ÷ (CN¥2.1b - CN¥522m) (Based on the trailing twelve months to September 2024).

Therefore, Shenglan Technology has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.8%.

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

How Are Returns Trending?

When we looked at the ROCE trend at Shenglan Technology, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 4.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shenglan Technology has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

To conclude, we've found that Shenglan Technology is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 7.4% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Shenglan Technology we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Shenglan Technology 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.