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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Shanghai New Centurion Network Information Technology (SHSE:605398), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 New Centurion Network Information Technology is:

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

0.041 = CN¥43m ÷ (CN¥1.2b - CN¥148m) (Based on the trailing twelve months to June 2024).

Thus, Shanghai New Centurion Network Information Technology has an ROCE of 4.1%. Even though it's in line with the industry average of 3.8%, it's still a low return by itself.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai New Centurion Network Information Technology's ROCE against it's prior returns. If you'd like to look at how Shanghai New Centurion Network Information Technology has performed in the past in other metrics, you can view this free graph of Shanghai New Centurion Network Information Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shanghai New Centurion Network Information Technology, we didn't gain much confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 4.1%. However it looks like Shanghai New Centurion Network Information Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shanghai New Centurion Network Information Technology has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Shanghai New Centurion Network Information Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai New Centurion Network Information Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last three years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 2 warning signs for Shanghai New Centurion Network Information Technology (1 is potentially serious) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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