When you want to find stocks with the potential to grow earnings multiples, there are often underlying trends that can give you a clue. First, identify an increasing Return on Invested Capital (ROCE) along with a consistently growing invested capital base. Simply put, these types of businesses are compounding machines, continually reinvesting earnings to maintain higher rates of return. With that said, at first glance for Shenzhen Desailly Battery Technology Co., Ltd. (SZSE:000049), the earnings trend won't surprise you, but let's take a closer look.
What is Return on Invested Capital (ROCE)?
For those new to ROCE, it measures the “return on investment” (profit before tax) a company generates from the capital it has put into its business, and the formula for calculating this metric for Shenzhen Desay Battery Technology is:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.048 = CNY474m ÷ (CNY160b – CNY6.3b) (Based on the trailing twelve months to March 2024).
To sum up, Shenzhen Desailly Battery Technology has an ROCE of 4.8%, which, while low on a standalone basis, is roughly the same as the average of 6.0% generated by the electricity industry.
Read our latest analysis for Shenzhen Desai Battery Technology
SZSE:000049 Return on equity August 12, 2024
In the chart above we've measured Shenzhen Desay Battery Technology's prior ROCE against its previous performance, but the future is arguably more important: if you want to see what analysts are predicting going forward you can take a look at this free analyst report on Shenzhen Desay Battery Technology.
ROCE Trends
Unfortunately, the trends are not good, with ROCE down from 29% five years ago, while invested capital has increased by 262%. That said, Shenzhen Desailly Battery Science & Technology raised some capital before its latest results were released, which may partly explain the increase in invested capital. It is unlikely that all of the funds raised are still deployed, and as a result Shenzhen Desailly Battery Science & Technology may not have received full-period earnings contributions from it.
As an aside, Shenzhen Desai Battery Technology has managed to reduce its current liabilities to 39% of its total assets. Therefore, some of this may be related to the lower ROCE. Additionally, this reduces the risk of the business by reducing the proportion of its suppliers and short-term creditors funding its operations. The company is essentially funding an increasing proportion of its operations with its own funds, which could make it less efficient at generating ROCE.
The conclusion is…
In summary, we are somewhat encouraged by Shenzhen Desailly Battery Technology's reinvestment in its own business, but we acknowledge that earnings are shrinking. As expected, the company's share price has risen only 5.1% over the past five years, which may indicate that investors are factoring this in going forward. Therefore, if you're looking for a multi-bagger, other stocks may offer better opportunities given their fundamental trends.
However, Shenzhen Desay Battery Technology does have some risks, and we've spotted 3 warning signs for Shenzhen Desay Battery Technology that might interest you.
Shenzhen Desailly Battery Technology doesn't have the highest profit margins, but check out this free list of companies with rock-solid balance sheets and high return on equity.
New: Manage your entire stock portfolio in one place
We've created the ultimate portfolio companion for stock investors – and it's FREE.
• Connect an unlimited number of portfolios and view the totals in one currency
• Get notified of new warning signs and risks via email and mobile
• Track the fair value of your stock
Try our demo portfolio for free
Have feedback about this article? Concerns about the content? Please contact us directly or email us at editorial-team (at) simplywallst.com.
This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
