What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 investigating Shanghai National Center of Testing and Inspection for Electric Cable and Wire (SZSE:301289), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shanghai National Center of Testing and Inspection for Electric Cable and Wire is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = CN¥84m ÷ (CN¥1.2b - CN¥104m) (Based on the trailing twelve months to March 2024).
Therefore, Shanghai National Center of Testing and Inspection for Electric Cable and Wire has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Professional Services industry average of 5.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai National Center of Testing and Inspection for Electric Cable and Wire's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai National Center of Testing and Inspection for Electric Cable and Wire.
What Does the ROCE Trend For Shanghai National Center of Testing and Inspection for Electric Cable and Wire Tell Us?
In terms of Shanghai National Center of Testing and Inspection for Electric Cable and Wire's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.4% from 23% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Shanghai National Center of Testing and Inspection for Electric Cable and Wire's ROCE
While returns have fallen for Shanghai National Center of Testing and Inspection for Electric Cable and Wire in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 14% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 1 warning sign with Shanghai National Center of Testing and Inspection for Electric Cable and Wire and understanding it should be part of your investment process.
While Shanghai National Center of Testing and Inspection for Electric Cable and Wire 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.