If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shanghai Emperor of Cleaning Hi-Tech (SHSE:603200), it didn't seem to tick all of these boxes.

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 Emperor of Cleaning Hi-Tech, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = CN¥37m ÷ (CN¥1.5b - CN¥457m) (Based on the trailing twelve months to December 2023).

So, Shanghai Emperor of Cleaning Hi-Tech has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.5%.

Above you can see how the current ROCE for Shanghai Emperor of Cleaning Hi-Tech 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 analyst report for Shanghai Emperor of Cleaning Hi-Tech .

So How Is Shanghai Emperor of Cleaning Hi-Tech's ROCE Trending?

On the surface, the trend of ROCE at Shanghai Emperor of Cleaning Hi-Tech doesn't inspire confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 3.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.6%. 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.

The Bottom Line On Shanghai Emperor of Cleaning Hi-Tech's ROCE

We're a bit apprehensive about Shanghai Emperor of Cleaning Hi-Tech because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 26% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing Shanghai Emperor of Cleaning Hi-Tech that you might find interesting.

While Shanghai Emperor of Cleaning Hi-Tech 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.