If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Senba Sensing TechnologyLtd (SZSE:300701), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Senba Sensing TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥54m ÷ (CN¥1.1b - CN¥88m) (Based on the trailing twelve months to September 2024).
So, Senba Sensing TechnologyLtd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.
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 Senba Sensing TechnologyLtd has performed in the past in other metrics, you can view this free graph of Senba Sensing TechnologyLtd's past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 14% five years ago, while the business's capital employed increased by 98%. Usually this isn't ideal, but given Senba Sensing TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Senba Sensing TechnologyLtd might not have received a full period of earnings contribution from it.
The Bottom Line
While returns have fallen for Senba Sensing TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 30% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One final note, you should learn about the 4 warning signs we've spotted with Senba Sensing TechnologyLtd (including 1 which is significant) .
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.
