What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shanghai Jin Jiang Online Network Service (SHSE:600650) and its trend of ROCE, we really liked what we saw.

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 Jin Jiang Online Network Service is:

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

0.00036 = CN¥1.6m ÷ (CN¥5.1b - CN¥565m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Jin Jiang Online Network Service has an ROCE of 0.04%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 4.5%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shanghai Jin Jiang Online Network Service has performed in the past in other metrics, you can view this free graph of Shanghai Jin Jiang Online Network Service's past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Shanghai Jin Jiang Online Network Service has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.04%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To bring it all together, Shanghai Jin Jiang Online Network Service has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 9.2% to shareholders. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 4 warning signs we've spotted with Shanghai Jin Jiang Online Network Service (including 2 which are a bit concerning) .

While Shanghai Jin Jiang Online Network Service 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.