If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Shengfeng Development (NASDAQ:SFWL) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Shengfeng Development, this is the formula:

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

0.085 = US$12m ÷ (US$264m - US$122m) (Based on the trailing twelve months to June 2024).

Thus, Shengfeng Development has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Logistics industry average of 9.5%.

View our latest analysis for Shengfeng Development

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'd like to look at how Shengfeng Development has performed in the past in other metrics, you can view this free graph of Shengfeng Development's past earnings, revenue and cash flow.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 8.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 47% more capital is being employed now too. So we're very much inspired by what we're seeing at Shengfeng Development thanks to its ability to profitably reinvest capital.

On a side note, Shengfeng Development's current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's great to see that Shengfeng Development can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Although the company may be facing some issues elsewhere since the stock has plunged 91% in the last year. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know more about Shengfeng Development, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Shengfeng Development 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.