There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shenzhen Yanmade Technology (SHSE:688312), we don't think it's current trends fit the mold of a multi-bagger.
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 Yanmade Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥71m ÷ (CN¥1.6b - CN¥241m) (Based on the trailing twelve months to September 2024).
Thus, Shenzhen Yanmade Technology has an ROCE of 5.2%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.
Above you can see how the current ROCE for Shenzhen Yanmade Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Yanmade Technology for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Shenzhen Yanmade Technology, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 5.2%. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Yanmade Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 23% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Shenzhen Yanmade Technology does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.
While Shenzhen Yanmade 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.
