Returns On Capital At Shenzhen Changhong Technology (SZSE:300151) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Shenzhen Changhong Technology (SZSE:300151), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shenzhen Changhong Technology:

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

0.025 = CN¥57m ÷ (CN¥2.6b - CN¥298m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Changhong Technology has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

View our latest analysis for Shenzhen Changhong Technology

Above you can see how the current ROCE for Shenzhen Changhong Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Changhong Technology .

What Does the ROCE Trend For Shenzhen Changhong Technology Tell Us?

In terms of Shenzhen Changhong Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.2% over the last five years. However it looks like Shenzhen Changhong Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Shenzhen Changhong Technology's ROCE

To conclude, we've found that Shenzhen Changhong Technology is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 122% gain to shareholders who have held over the last five years. 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 Changhong Technology we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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

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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.