Returns Are Gaining Momentum At Shenzhen Institute of Building Research (SZSE:300675)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Shenzhen Institute of Building Research (SZSE:300675) and its trend of ROCE, 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. The formula for this calculation on Shenzhen Institute of Building Research is:

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

0.0025 = CN¥2.1m ÷ (CN¥1.4b - CN¥517m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Institute of Building Research has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 6.1%.

See our latest analysis for Shenzhen Institute of Building Research

In the above chart we have measured Shenzhen Institute of Building Research's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Institute of Building Research .

How Are Returns Trending?

Shenzhen Institute of Building Research has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.3% on its capital. In addition to that, Shenzhen Institute of Building Research is employing 49% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Shenzhen Institute of Building Research's ROCE

Long story short, we're delighted to see that Shenzhen Institute of Building Research's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Shenzhen Institute of Building Research we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Shenzhen Institute of Building Research 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.