Investors Could Be Concerned With Shenzhen Longli TechnologyLtd's (SZSE:300752) Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shenzhen Longli TechnologyLtd (SZSE:300752), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shenzhen Longli TechnologyLtd, this is the formula:

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

0.061 = CN¥71m ÷ (CN¥1.8b - CN¥624m) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Longli TechnologyLtd has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 4.2%.

See our latest analysis for Shenzhen Longli TechnologyLtd

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're interested in investigating Shenzhen Longli TechnologyLtd's past further, check out this free graph covering Shenzhen Longli TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 38%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shenzhen Longli TechnologyLtd might not have received a full period of earnings contribution from it.

The Bottom Line On Shenzhen Longli TechnologyLtd's ROCE

To conclude, we've found that Shenzhen Longli TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 35% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shenzhen Longli TechnologyLtd has the makings of a multi-bagger.

Like most companies, Shenzhen Longli TechnologyLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

While Shenzhen Longli TechnologyLtd 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.