Investors Could Be Concerned With Shenglan Technology's (SZSE:300843) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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 Shenglan Technology (SZSE:300843) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shenglan Technology is:

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

0.037 = CN¥54m ÷ (CN¥2.1b - CN¥654m) (Based on the trailing twelve months to September 2023).

Thus, Shenglan Technology has an ROCE of 3.7%. 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 Shenglan Technology

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 Shenglan Technology has performed in the past in other metrics, you can view this free graph of Shenglan Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenglan Technology Tell Us?

On the surface, the trend of ROCE at Shenglan Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.7% from 20% five years ago. However it looks like Shenglan Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Shenglan Technology's ROCE

To conclude, we've found that Shenglan Technology is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 9.2% over the last three years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Shenglan Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

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.