What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 INVT ElectricLtd (SZSE:002334), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Shenzhen INVT ElectricLtd is:

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

0.06 = CN¥199m ÷ (CN¥5.1b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen INVT ElectricLtd has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

In the above chart we have measured Shenzhen INVT ElectricLtd'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 INVT ElectricLtd .

What Does the ROCE Trend For Shenzhen INVT ElectricLtd Tell Us?

There are better returns on capital out there than what we're seeing at Shenzhen INVT ElectricLtd. Over the past five years, ROCE has remained relatively flat at around 6.0% and the business has deployed 67% 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.

The Bottom Line On Shenzhen INVT ElectricLtd's ROCE

Long story short, while Shenzhen INVT ElectricLtd has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 2 warning signs for Shenzhen INVT ElectricLtd you'll probably want to know about.

While Shenzhen INVT ElectricLtd 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.