Tianjin Saixiang TechnologyLtd (SZSE:002337) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Tianjin Saixiang TechnologyLtd (SZSE:002337) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Tianjin Saixiang TechnologyLtd, this is the formula:

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

0.03 = CN¥41m ÷ (CN¥2.0b - CN¥646m) (Based on the trailing twelve months to September 2024).

Thus, Tianjin Saixiang TechnologyLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

Check out our latest analysis for Tianjin Saixiang TechnologyLtd

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

What Can We Tell From Tianjin Saixiang TechnologyLtd's ROCE Trend?

We're delighted to see that Tianjin Saixiang TechnologyLtd is reaping rewards from its investments and has now broken into profitability. The company now earns 3.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Tianjin Saixiang TechnologyLtd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 32% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

To sum it up, Tianjin Saixiang TechnologyLtd is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 64% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Tianjin Saixiang TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Tianjin Saixiang TechnologyLtd that you might be interested in.

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.