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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shanghai @hubLtd (SHSE:603881) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai @hubLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CN¥283m ÷ (CN¥7.2b - CN¥2.2b) (Based on the trailing twelve months to September 2023).
So, Shanghai @hubLtd has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 3.8% generated by the IT industry, it's much better.
Check out our latest analysis for Shanghai @hubLtd
Above you can see how the current ROCE for Shanghai @hubLtd 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 report on analyst forecasts for the company.
So How Is Shanghai @hubLtd's ROCE Trending?
On the surface, the trend of ROCE at Shanghai @hubLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Shanghai @hubLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Shanghai @hubLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Shanghai @hubLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 33% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Shanghai @hubLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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.