Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shenzhen Jove Enterprise (SZSE:300814) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Shenzhen Jove Enterprise is:

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

0.0085 = CN¥15m ÷ (CN¥2.7b - CN¥940m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Jove Enterprise has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Jove Enterprise's ROCE against it's prior returns. If you'd like to look at how Shenzhen Jove Enterprise has performed in the past in other metrics, you can view this free graph of Shenzhen Jove Enterprise's past earnings, revenue and cash flow.

So How Is Shenzhen Jove Enterprise's ROCE Trending?

On the surface, the trend of ROCE at Shenzhen Jove Enterprise doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shenzhen Jove Enterprise has decreased its current liabilities to 35% 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.

The Bottom Line On Shenzhen Jove Enterprise's ROCE

Bringing it all together, while we're somewhat encouraged by Shenzhen Jove Enterprise's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 27% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Shenzhen Jove Enterprise we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

While Shenzhen Jove Enterprise isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.