Investors Should Be Encouraged By Shenzhen Sinexcel ElectricLtd's (SZSE:300693) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of Shenzhen Sinexcel ElectricLtd (SZSE:300693) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen Sinexcel ElectricLtd:

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

0.26 = CN¥379m ÷ (CN¥3.2b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Sinexcel ElectricLtd has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 6.3% earned by companies in a similar industry.

View our latest analysis for Shenzhen Sinexcel ElectricLtd

In the above chart we have measured Shenzhen Sinexcel ElectricLtd'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 Sinexcel ElectricLtd .

The Trend Of ROCE

We like the trends that we're seeing from Shenzhen Sinexcel ElectricLtd. Over the last five years, returns on capital employed have risen substantially to 26%. The amount of capital employed has increased too, by 143%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 53% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Shenzhen Sinexcel ElectricLtd's ROCE

In summary, it's great to see that Shenzhen Sinexcel ElectricLtd 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Shenzhen Sinexcel ElectricLtd can keep these trends up, it could have a bright future ahead.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 300693 on our platform that is definitely worth checking out.

Shenzhen Sinexcel ElectricLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.