Shenzhen Easttop Supply Chain Management (SZSE:002889) Hasn't Managed To Accelerate Its Returns

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Easttop Supply Chain Management (SZSE:002889) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shenzhen Easttop Supply Chain Management, this is the formula:

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

0.078 = CN¥178m ÷ (CN¥4.7b - CN¥2.4b) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Easttop Supply Chain Management has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Logistics industry average of 7.1%.

View our latest analysis for Shenzhen Easttop Supply Chain Management

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 Easttop Supply Chain Management's past further, check out this free graph covering Shenzhen Easttop Supply Chain Management's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Easttop Supply Chain Management's ROCE Trend?

There are better returns on capital out there than what we're seeing at Shenzhen Easttop Supply Chain Management. The company has employed 60% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 51% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 51%, some of that risk is still prevalent.

The Key Takeaway

In summary, Shenzhen Easttop Supply Chain Management has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 1 warning sign for Shenzhen Easttop Supply Chain Management you'll probably want to know about.

While Shenzhen Easttop Supply Chain Management may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.