Shenzhen Transsion Holdings (SHSE:688036) Is Reinvesting To Multiply In Value

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Shenzhen Transsion Holdings (SHSE:688036), we 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 Transsion Holdings is:

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

0.31 = CN¥7.4b ÷ (CN¥48b - CN¥24b) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Transsion Holdings has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 5.3% earned by companies in a similar industry.

See our latest analysis for Shenzhen Transsion Holdings

In the above chart we have measured Shenzhen Transsion Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Transsion Holdings .

The Trend Of ROCE

Shenzhen Transsion Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 290% more capital into its operations. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a separate but related note, it's important to know that Shenzhen Transsion Holdings has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shenzhen Transsion Holdings' ROCE

In summary, we're delighted to see that Shenzhen Transsion Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Yet over the last three years the stock has declined 37%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Shenzhen Transsion Holdings does have some risks though, and we've spotted 1 warning sign for Shenzhen Transsion Holdings that you might be interested in.

Shenzhen Transsion Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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