Capital Allocation Trends At Shenzhen Longood Intelligent ElectricLTD (SZSE:300543) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shenzhen Longood Intelligent ElectricLTD (SZSE:300543) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Longood Intelligent ElectricLTD:

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

0.016 = CN¥24m ÷ (CN¥2.1b - CN¥619m) (Based on the trailing twelve months to September 2024).

Therefore, Shenzhen Longood Intelligent ElectricLTD has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Shenzhen Longood Intelligent ElectricLTD

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

What Does the ROCE Trend For Shenzhen Longood Intelligent ElectricLTD Tell Us?

On the surface, the trend of ROCE at Shenzhen Longood Intelligent ElectricLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shenzhen Longood Intelligent ElectricLTD's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 13% 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.

One more thing: We've identified 3 warning signs with Shenzhen Longood Intelligent ElectricLTD (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

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.