The Returns On Capital At ShenZhen QiangRui Precision Technology (SZSE:301128) Don't Inspire Confidence

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. However, after investigating ShenZhen QiangRui Precision Technology (SZSE:301128), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 QiangRui Precision Technology, this is the formula:

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

0.097 = CN¥90m ÷ (CN¥1.4b - CN¥440m) (Based on the trailing twelve months to June 2024).

Therefore, ShenZhen QiangRui Precision Technology has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

See our latest analysis for ShenZhen QiangRui Precision Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how ShenZhen QiangRui Precision Technology has performed in the past in other metrics, you can view this free graph of ShenZhen QiangRui Precision Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at ShenZhen QiangRui Precision Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 35% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ShenZhen QiangRui Precision Technology. In light of this, the stock has only gained 6.0% over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing ShenZhen QiangRui Precision Technology we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While ShenZhen QiangRui Precision 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.