Smartsens Technology (Shanghai) (SHSE:688213) Shareholders Will Want The ROCE Trajectory To Continue

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Smartsens Technology (Shanghai)'s (SHSE:688213) returns on capital, so let's have a look.

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 Smartsens Technology (Shanghai) is:

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

0.019 = CN¥78m ÷ (CN¥6.9b - CN¥2.7b) (Based on the trailing twelve months to March 2024).

Thus, Smartsens Technology (Shanghai) has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 3.9%.

Check out our latest analysis for Smartsens Technology (Shanghai)

Above you can see how the current ROCE for Smartsens Technology (Shanghai) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Smartsens Technology (Shanghai) for free.

How Are Returns Trending?

We're delighted to see that Smartsens Technology (Shanghai) is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 1.9% which is a sight for sore eyes. Not only that, but the company is utilizing 636% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Smartsens Technology (Shanghai)'s ROCE

Overall, Smartsens Technology (Shanghai) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

Smartsens Technology (Shanghai) does have some risks though, and we've spotted 1 warning sign for Smartsens Technology (Shanghai) that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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