The Returns At Shenzhen Pagoda Industrial (Group) (HKG:2411) Aren't Growing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Shenzhen Pagoda Industrial (Group) (HKG:2411), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Pagoda Industrial (Group) is:

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

0.091 = CN¥372m ÷ (CN¥7.6b - CN¥3.5b) (Based on the trailing twelve months to December 2023).

So, Shenzhen Pagoda Industrial (Group) has an ROCE of 9.1%. Even though it's in line with the industry average of 8.6%, it's still a low return by itself.

View our latest analysis for Shenzhen Pagoda Industrial (Group)

In the above chart we have measured Shenzhen Pagoda Industrial (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Pagoda Industrial (Group) .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Shenzhen Pagoda Industrial (Group). Over the past four years, ROCE has remained relatively flat at around 9.1% and the business has deployed 48% more capital into its operations. 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.

On a side note, Shenzhen Pagoda Industrial (Group)'s current liabilities are still rather high at 46% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In conclusion, Shenzhen Pagoda Industrial (Group) has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 50% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shenzhen Pagoda Industrial (Group) (of which 1 doesn't sit too well with us!) that you should know about.

While Shenzhen Pagoda Industrial (Group) 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.