If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Shanghai Belling (SHSE:600171) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai Belling is:

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

0.028 = CN¥120m ÷ (CN¥4.8b - CN¥561m) (Based on the trailing twelve months to March 2024).

So, Shanghai Belling has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 3.9%.

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're interested in investigating Shanghai Belling's past further, check out this free graph covering Shanghai Belling's past earnings, revenue and cash flow.

What Can We Tell From Shanghai Belling's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 2.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 58%. So we're very much inspired by what we're seeing at Shanghai Belling thanks to its ability to profitably reinvest capital.

Our Take On Shanghai Belling's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shanghai Belling has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 42% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Shanghai Belling does come with some risks, and we've found 2 warning signs that you should be aware of.

While Shanghai Belling 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com