Shenzhen Neoway TechnologyLtd (SHSE:688159) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Shenzhen Neoway TechnologyLtd (SHSE:688159) 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 Neoway TechnologyLtd:

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

0.14 = CN¥122m ÷ (CN¥1.9b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Neoway TechnologyLtd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 4.1% it's much better.

See our latest analysis for Shenzhen Neoway 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Neoway TechnologyLtd.

What The Trend Of ROCE Can Tell Us

Shenzhen Neoway TechnologyLtd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 56% more capital is being employed now too. So we're very much inspired by what we're seeing at Shenzhen Neoway TechnologyLtd thanks to its ability to profitably reinvest capital.

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 56% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

All in all, it's terrific to see that Shenzhen Neoway TechnologyLtd is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 46% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 2 warning signs we've spotted with Shenzhen Neoway TechnologyLtd (including 1 which is potentially serious) .

While Shenzhen Neoway TechnologyLtd 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.