Shenzhen Center Power Tech (SZSE:002733) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Shenzhen Center Power Tech (SZSE:002733) looks quite promising in regards to its trends of return on capital.

Understanding 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 Center Power Tech, this is the formula:

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

0.057 = CN¥187m ÷ (CN¥5.4b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Center Power Tech has an ROCE of 5.7%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.

Check out our latest analysis for Shenzhen Center Power Tech

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

What Does the ROCE Trend For Shenzhen Center Power Tech Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.7%. The amount of capital employed has increased too, by 25%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

In summary, it's great to see that Shenzhen Center Power Tech 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 38% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 4 warning signs for Shenzhen Center Power Tech (1 is potentially serious) you should be aware of.

While Shenzhen Center Power Tech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.