Shenzhen Lifotronic Technology (SHSE:688389) Might Have The Makings Of A Multi-Bagger

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, Shenzhen Lifotronic Technology (SHSE:688389) looks quite promising in regards to its trends of return on capital.

Understanding 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)

0.17 = CN¥311m ÷ (CN¥2.3b - CN¥525m) (Based on the trailing twelve months to December 2023).

Therefore, Shenzhen Lifotronic Technology has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.5% it's much better.

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 .

What Does the ROCE Trend For Shenzhen Lifotronic Technology Tell Us?

Investors would be pleased with what's happening at Shenzhen Lifotronic Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 157% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Shenzhen Lifotronic Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shenzhen Lifotronic Technology has. Astute investors may have an opportunity here because the stock has declined 25% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for Shenzhen Lifotronic Technology that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.