If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Shanghai TianchenLtd (SHSE:600620) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for Shanghai TianchenLtd, this is the formula:

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

0.042 = CN¥117m ÷ (CN¥3.3b - CN¥588m) (Based on the trailing twelve months to September 2023).

So, Shanghai TianchenLtd has an ROCE of 4.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.8%.

Check out our latest analysis for Shanghai TianchenLtd

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

What Does the ROCE Trend For Shanghai TianchenLtd Tell Us?

Shareholders will be relieved that Shanghai TianchenLtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.2% on its capital. While returns have increased, the amount of capital employed by Shanghai TianchenLtd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 18% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Shanghai TianchenLtd's ROCE

To sum it up, Shanghai TianchenLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Shanghai TianchenLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shanghai TianchenLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.