Shenzhen Laibao Hi-Tech (SZSE:002106) 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? 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. With that in mind, we've noticed some promising trends at Shenzhen Laibao Hi-Tech (SZSE:002106) so let's look a bit deeper.

What Is 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. The formula for this calculation on Shenzhen Laibao Hi-Tech is:

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

0.052 = CN¥368m ÷ (CN¥8.3b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Laibao Hi-Tech has an ROCE of 5.2%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

View 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're interested in investigating Shenzhen Laibao Hi-Tech's past further, check out this free graph covering Shenzhen Laibao Hi-Tech's past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 5.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 76% more capital is being employed now too. So we're very much inspired by what we're seeing at Shenzhen Laibao Hi-Tech thanks to its ability to profitably reinvest capital.

The Bottom Line On Shenzhen Laibao Hi-Tech's ROCE

In summary, it's great to see that Shenzhen Laibao Hi-Tech can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 60% return over the last five years. In light of that, we think it's worth looking further into this stock because if Shenzhen Laibao Hi-Tech can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Shenzhen Laibao Hi-Tech you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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