If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shanghai Zhonggu Logistics (SHSE:603565), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Shanghai Zhonggu Logistics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CN¥1.7b ÷ (CN¥23b - CN¥5.8b) (Based on the trailing twelve months to June 2023).
So, Shanghai Zhonggu Logistics has an ROCE of 9.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.9%.
View our latest analysis for Shanghai Zhonggu Logistics
Above you can see how the current ROCE for Shanghai Zhonggu Logistics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shanghai Zhonggu Logistics here for free.
What Can We Tell From Shanghai Zhonggu Logistics' ROCE Trend?
In terms of Shanghai Zhonggu Logistics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 15% five years ago. However it looks like Shanghai Zhonggu Logistics 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 related note, Shanghai Zhonggu Logistics has decreased its current liabilities to 25% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Shanghai Zhonggu Logistics' ROCE
Bringing it all together, while we're somewhat encouraged by Shanghai Zhonggu Logistics' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 26% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing to note, we've identified 1 warning sign with Shanghai Zhonggu Logistics and understanding it should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.