Some Investors May Be Worried About Shenzhen United Winners Laser's (SHSE:688518) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shenzhen United Winners Laser (SHSE:688518) 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 Shenzhen United Winners Laser, this is the formula:

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

0.029 = CN¥89m ÷ (CN¥6.9b - CN¥3.8b) (Based on the trailing twelve months to June 2024).

So, Shenzhen United Winners Laser has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See our latest analysis for Shenzhen United Winners Laser

In the above chart we have measured Shenzhen United Winners Laser's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen United Winners Laser .

So How Is Shenzhen United Winners Laser's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 9.3% five years ago, while the business's capital employed increased by 254%. That being said, Shenzhen United Winners Laser raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shenzhen United Winners Laser probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Shenzhen United Winners Laser's current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shenzhen United Winners Laser's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 54% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shenzhen United Winners Laser has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Shenzhen United Winners Laser (1 can't be ignored) 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.

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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.