Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 International Holdings (HKG:152), 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 International Holdings is:

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

0.06 = HK$5.4b ÷ (HK$128b - HK$38b) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen International Holdings has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 5.2%.

Above you can see how the current ROCE for Shenzhen International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen International Holdings .

How Are Returns Trending?

The returns on capital haven't changed much for Shenzhen International Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 6.0% and the business has deployed 26% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 30% of total assets, this reported ROCE would probably be less than6.0% because total capital employed would be higher.The 6.0% ROCE could be even lower if current liabilities weren't 30% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From Shenzhen International Holdings' ROCE

As we've seen above, Shenzhen International Holdings' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen International Holdings (of which 1 shouldn't be ignored!) that you should know about.

While Shenzhen International Holdings 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.