Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Shandong Shanda OumasoftLTD (SZSE:301185), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shandong Shanda OumasoftLTD:

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

0.044 = CN¥44m ÷ (CN¥1.0b - CN¥29m) (Based on the trailing twelve months to September 2023).

Thus, Shandong Shanda OumasoftLTD has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 2.7% generated by the Software industry, it's much better.

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 Shandong Shanda OumasoftLTD has performed in the past in other metrics, you can view this free graph of Shandong Shanda OumasoftLTD's past earnings, revenue and cash flow.

What Can We Tell From Shandong Shanda OumasoftLTD's ROCE Trend?

On the surface, the trend of ROCE at Shandong Shanda OumasoftLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Shandong Shanda OumasoftLTD is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 5.5% to shareholders over the last year. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Shandong Shanda OumasoftLTD that you might find interesting.

While Shandong Shanda OumasoftLTD 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.