Returns On Capital Are Showing Encouraging Signs At Shenzhen VMAX New Energy (SHSE:688612)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Shenzhen VMAX New Energy (SHSE:688612) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Shenzhen VMAX New Energy, this is the formula:

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

0.13 = CN¥499m ÷ (CN¥7.5b - CN¥3.8b) (Based on the trailing twelve months to December 2024).

Therefore, Shenzhen VMAX New Energy has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Auto Components industry.

View our latest analysis for Shenzhen VMAX New Energy

Above you can see how the current ROCE for Shenzhen VMAX New Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shenzhen VMAX New Energy for free.

What Can We Tell From Shenzhen VMAX New Energy's ROCE Trend?

Investors would be pleased with what's happening at Shenzhen VMAX New Energy. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 823%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Shenzhen VMAX New Energy has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shenzhen VMAX New Energy's ROCE

In summary, it's great to see that Shenzhen VMAX New Energy can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 20% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Shenzhen VMAX New Energy does come with some risks, and we've found 3 warning signs that you should be aware of.

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.

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.