What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Sanjiang Shopping ClubLtd (SHSE:601116) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 Sanjiang Shopping ClubLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = CN¥107m ÷ (CN¥5.1b - CN¥1.6b) (Based on the trailing twelve months to March 2023).
Thus, Sanjiang Shopping ClubLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 6.1%.
Check out our latest analysis for Sanjiang Shopping ClubLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanjiang Shopping ClubLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sanjiang Shopping ClubLtd, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Sanjiang Shopping ClubLtd, we didn't gain much confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 3.1%. However it looks like Sanjiang Shopping ClubLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Sanjiang Shopping ClubLtd has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Sanjiang Shopping ClubLtd's ROCE
To conclude, we've found that Sanjiang Shopping ClubLtd is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing to note, we've identified 2 warning signs with Sanjiang Shopping ClubLtd and understanding these should be part of your investment process.
While Sanjiang Shopping ClubLtd 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.