If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shandong Nanshan Fashion Sci-Tech (SZSE:300918), we don’t think it’s current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Shandong Nanshan Fashion Sci-Tech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.085 = CN¥230m ÷ (CN¥3.7b – CN¥964m) (Based on the trailing twelve months to March 2024).
Thus, Shandong Nanshan Fashion Sci-Tech has an ROCE of 8.5%. In absolute terms, that’s a low return, but it’s much better than the Luxury industry average of 6.6%.
Check out our latest analysis for Shandong Nanshan Fashion Sci-Tech
In the above chart we have measured Shandong Nanshan Fashion Sci-Tech’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Shandong Nanshan Fashion Sci-Tech for free.
How Are Returns Trending?
The trend of ROCE doesn’t look fantastic because it’s fallen from 18% five years ago, while the business’s capital employed increased by 182%. However, some of the increase in capital employed could be attributed to the recent capital raising that’s been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Shandong Nanshan Fashion Sci-Tech probably hasn’t received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a side note, Shandong Nanshan Fashion Sci-Tech has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Shandong Nanshan Fashion Sci-Tech’s ROCE
In summary, Shandong Nanshan Fashion Sci-Tech is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Additionally, the stock’s total return to shareholders over the last three years has been flat, which isn’t too surprising. Therefore based on the analysis done in this article, we don’t think Shandong Nanshan Fashion Sci-Tech has the makings of a multi-bagger.
Shandong Nanshan Fashion Sci-Tech does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.
While Shandong Nanshan Fashion Sci-Tech 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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Find out whether Shandong Nanshan Fashion Sci-Tech 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.