If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shanghai Electric Wind Power Group's (SHSE:688660) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Shanghai Electric Wind Power Group:

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

0.001 = CN¥12m ÷ (CN¥26b - CN¥14b) (Based on the trailing twelve months to June 2022).

Thus, Shanghai Electric Wind Power Group has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.8%.

See our latest analysis for Shanghai Electric Wind Power Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Electric Wind Power Group's ROCE against it's prior returns. If you'd like to look at how Shanghai Electric Wind Power Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Shanghai Electric Wind Power Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 0.1% on its capital. In addition to that, Shanghai Electric Wind Power Group is employing 249% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 54%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

Overall, Shanghai Electric Wind Power Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 46% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Shanghai Electric Wind Power Group, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Shanghai Electric Wind Power 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.