If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Shanghai Yongguan Adhesive Products (SHSE:603681) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shanghai Yongguan Adhesive Products:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = CN¥92m ÷ (CN¥6.4b - CN¥2.4b) (Based on the trailing twelve months to June 2023).
Thus, Shanghai Yongguan Adhesive Products has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.
See our latest analysis for Shanghai Yongguan Adhesive Products
In the above chart we have measured Shanghai Yongguan Adhesive Products' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Yongguan Adhesive Products.
What Can We Tell From Shanghai Yongguan Adhesive Products' ROCE Trend?
On the surface, the trend of ROCE at Shanghai Yongguan Adhesive Products doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Shanghai Yongguan Adhesive Products' current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.3%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
What We Can Learn From Shanghai Yongguan Adhesive Products' ROCE
While returns have fallen for Shanghai Yongguan Adhesive Products in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 23% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Shanghai Yongguan Adhesive Products does have some risks though, and we've spotted 3 warning signs for Shanghai Yongguan Adhesive Products that you might be interested in.
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.