If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shanghai Supezet Engineering Technology (SHSE:688121) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Shanghai Supezet Engineering Technology, this is the formula:

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

0.054 = CN¥234m ÷ (CN¥8.2b - CN¥3.9b) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Supezet Engineering Technology has an ROCE of 5.4%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Supezet Engineering Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Supezet Engineering Technology.

What Does the ROCE Trend For Shanghai Supezet Engineering Technology Tell Us?

We weren't thrilled with the trend because Shanghai Supezet Engineering Technology's ROCE has reduced by 78% over the last five years, while the business employed 949% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shanghai Supezet Engineering Technology's earnings and if they change as a result from the capital raise.

On a side note, Shanghai Supezet Engineering Technology has done well to pay down its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Shanghai Supezet Engineering Technology's ROCE

To conclude, we've found that Shanghai Supezet Engineering Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 67% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shanghai Supezet Engineering Technology (of which 1 is significant!) that you should know about.

While Shanghai Supezet Engineering 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.