What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai Pioneer Holding (HKG:1345), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Pioneer Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥134m ÷ (CN¥1.5b - CN¥443m) (Based on the trailing twelve months to December 2023).
Therefore, Shanghai Pioneer Holding has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Healthcare industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Pioneer Holding's ROCE against it's prior returns. If you'd like to look at how Shanghai Pioneer Holding has performed in the past in other metrics, you can view this free graph of Shanghai Pioneer Holding's past earnings, revenue and cash flow.
So How Is Shanghai Pioneer Holding's ROCE Trending?
There hasn't been much to report for Shanghai Pioneer Holding's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Shanghai Pioneer Holding doesn't end up being a multi-bagger in a few years time.
In Conclusion...
In summary, Shanghai Pioneer Holding isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 163% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shanghai Pioneer Holding (of which 1 is concerning!) that 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.