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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shanghai Yanpu Metal ProductsLtd (SHSE:605128) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Shanghai Yanpu Metal ProductsLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥78m ÷ (CN¥2.3b - CN¥744m) (Based on the trailing twelve months to September 2023).
Therefore, Shanghai Yanpu Metal ProductsLtd has an ROCE of 5.0%. On its own, that's a low figure but it's around the 5.8% average generated by the Auto Components industry.
See our latest analysis for Shanghai Yanpu Metal ProductsLtd
In the above chart we have measured Shanghai Yanpu Metal ProductsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because Shanghai Yanpu Metal ProductsLtd's ROCE has reduced by 78% over the last five years, while the business employed 281% more capital. That being said, Shanghai Yanpu Metal ProductsLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shanghai Yanpu Metal ProductsLtd's earnings and if they change as a result from the capital raise.
On a side note, Shanghai Yanpu Metal ProductsLtd has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. 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.
The Bottom Line On Shanghai Yanpu Metal ProductsLtd's ROCE
While returns have fallen for Shanghai Yanpu Metal ProductsLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 100% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a final note, we found 2 warning signs for Shanghai Yanpu Metal ProductsLtd (1 can't be ignored) you should be aware of.
While Shanghai Yanpu Metal ProductsLtd 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.