Returns Are Gaining Momentum At Shenzhen Lifotronic Technology (SHSE:688389)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Shenzhen Lifotronic Technology (SHSE:688389) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shenzhen Lifotronic Technology:

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

0.19 = CN¥373m ÷ (CN¥2.8b - CN¥870m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Lifotronic Technology has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Medical Equipment industry.

Check out our latest analysis for Shenzhen Lifotronic Technology

Above you can see how the current ROCE for Shenzhen Lifotronic 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 Lifotronic Technology .

So How Is Shenzhen Lifotronic Technology's ROCE Trending?

We like the trends that we're seeing from Shenzhen Lifotronic Technology. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 177%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

All in all, it's terrific to see that Shenzhen Lifotronic Technology is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 15% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Shenzhen Lifotronic Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic for 688389 helps visualize whether it is currently trading for a fair price.

While Shenzhen Lifotronic 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.