What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Although, when we looked at Shanghai Putailai New Energy TechnologyLtd (SHSE:603659), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Putailai New Energy TechnologyLtd:

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

0.078 = CN¥1.9b ÷ (CN¥42b - CN¥17b) (Based on the trailing twelve months to March 2024).

So, Shanghai Putailai New Energy TechnologyLtd has an ROCE of 7.8%. 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.

Above you can see how the current ROCE for Shanghai Putailai New Energy TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Putailai New Energy TechnologyLtd .

So How Is Shanghai Putailai New Energy TechnologyLtd's ROCE Trending?

We weren't thrilled with the trend because Shanghai Putailai New Energy TechnologyLtd's ROCE has reduced by 57% over the last five years, while the business employed 541% more capital. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shanghai Putailai New Energy TechnologyLtd might not have received a full period of earnings contribution from it.

On a side note, Shanghai Putailai New Energy TechnologyLtd's current liabilities are still rather high at 42% 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.

The Bottom Line On Shanghai Putailai New Energy TechnologyLtd's ROCE

To conclude, we've found that Shanghai Putailai New Energy TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shanghai Putailai New Energy TechnologyLtd (of which 1 doesn't sit too well with us!) that you should know about.

While Shanghai Putailai New Energy TechnologyLtd 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.

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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.