To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of Shenzhen Kedali Industry (SZSE:002850) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Shenzhen Kedali Industry, this is the formula:

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

0.12 = CN¥1.6b ÷ (CN¥18b - CN¥5.0b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Kedali Industry has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.0% it's much better.

In the above chart we have measured Shenzhen Kedali Industry's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Kedali Industry .

What Can We Tell From Shenzhen Kedali Industry's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 418% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Shenzhen Kedali Industry has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Shenzhen Kedali Industry's ROCE

In the end, Shenzhen Kedali Industry has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 177% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 1 warning sign for Shenzhen Kedali Industry that we think you should be aware of.

While Shenzhen Kedali Industry 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.