Some Investors May Be Worried About Shenzhen Xunjiexing Technology's (SHSE:688655) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Shenzhen Xunjiexing Technology (SHSE:688655) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Xunjiexing Technology:

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

0.0012 = CN¥996k ÷ (CN¥1.1b - CN¥274m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Xunjiexing Technology has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

View our latest analysis for Shenzhen Xunjiexing Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Xunjiexing Technology's ROCE against it's prior returns. If you'd like to look at how Shenzhen Xunjiexing Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Xunjiexing Technology's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Xunjiexing Technology's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 147%. Usually this isn't ideal, but given Shenzhen Xunjiexing Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Shenzhen Xunjiexing Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On Shenzhen Xunjiexing Technology's ROCE

In summary, Shenzhen Xunjiexing Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 57% 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 Xunjiexing Technology has the makings of a multi-bagger.

If you'd like to know more about Shenzhen Xunjiexing Technology, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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.