To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shenzhen Forms Syntron InformationLtd (SZSE:300468), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Forms Syntron InformationLtd:

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

0.0074 = CN¥12m ÷ (CN¥1.7b - CN¥110m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Forms Syntron InformationLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.7%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shenzhen Forms Syntron InformationLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Forms Syntron InformationLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Shenzhen Forms Syntron InformationLtd, we didn't gain much confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 0.7%. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Shenzhen Forms Syntron InformationLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Forms Syntron InformationLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Shenzhen Forms Syntron InformationLtd we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.