Investors Met With Slowing Returns on Capital At Shenzhen Laibao Hi-Tech (SZSE:002106)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shenzhen Laibao Hi-Tech (SZSE:002106) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Laibao Hi-Tech:

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

0.047 = CN¥380m ÷ (CN¥9.2b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

So, Shenzhen Laibao Hi-Tech has an ROCE of 4.7%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

See our latest analysis for Shenzhen Laibao Hi-Tech

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'd like to look at how Shenzhen Laibao Hi-Tech has performed in the past in other metrics, you can view this free graph of Shenzhen Laibao Hi-Tech's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Shenzhen Laibao Hi-Tech's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.7% for the last five years, and the capital employed within the business has risen 98% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

Long story short, while Shenzhen Laibao Hi-Tech has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Shenzhen Laibao Hi-Tech does have some risks though, and we've spotted 1 warning sign for Shenzhen Laibao Hi-Tech that you might be interested in.

While Shenzhen Laibao Hi-Tech 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.