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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Shenzhen RongDa Photosensitive Science & Technology (SZSE:300576) and its ROCE trend, we weren’t exactly thrilled.
What Is 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. To calculate this metric for Shenzhen RongDa Photosensitive Science & Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.075 = CN¥96m ÷ (CN¥1.7b – CN¥365m) (Based on the trailing twelve months to September 2023).
Therefore, Shenzhen RongDa Photosensitive Science & Technology has an ROCE of 7.5%. On its own that’s a low return, but compared to the average of 5.8% generated by the Chemicals industry, it’s much better.
View our latest analysis for Shenzhen RongDa Photosensitive Science & 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’re interested in investigating Shenzhen RongDa Photosensitive Science & Technology’s past further, check out this free graph covering Shenzhen RongDa Photosensitive Science & Technology’s past earnings, revenue and cash flow.
So How Is Shenzhen RongDa Photosensitive Science & Technology’s ROCE Trending?
In terms of Shenzhen RongDa Photosensitive Science & Technology’s historical ROCE trend, it doesn’t exactly demand attention. The company has consistently earned 7.5% for the last five years, and the capital employed within the business has risen 199% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
The Key Takeaway
Long story short, while Shenzhen RongDa Photosensitive Science & Technology has been reinvesting its capital, the returns that it’s generating haven’t increased. Yet to long term shareholders the stock has gifted them an incredible 348% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Shenzhen RongDa Photosensitive Science & Technology does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
While Shenzhen RongDa Photosensitive Science & Technology 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Shenzhen RongDa Photosensitive Science & Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
