Shenzhen Tongyi Industry (SZSE:300538) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Shenzhen Tongyi Industry (SZSE:300538) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Shenzhen Tongyi Industry, this is the formula:

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

0.031 = CN¥45m ÷ (CN¥2.1b - CN¥678m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Tongyi Industry has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.0%.

Check out our latest analysis for Shenzhen Tongyi Industry

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

The Trend Of ROCE

In terms of Shenzhen Tongyi Industry's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shenzhen Tongyi Industry has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Shenzhen Tongyi Industry's ROCE

In summary, Shenzhen Tongyi Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 11% 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 Tongyi Industry has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Shenzhen Tongyi Industry (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Shenzhen Tongyi Industry 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.