What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Shanghai CDXJ Digital TechnologyLTD (SHSE:603887), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Shanghai CDXJ Digital TechnologyLTD is:

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

0.019 = CN¥99m ÷ (CN¥8.3b - CN¥3.0b) (Based on the trailing twelve months to September 2023).

Thus, Shanghai CDXJ Digital TechnologyLTD has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.8%.

View our latest analysis for Shanghai CDXJ Digital TechnologyLTD

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

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Shanghai CDXJ Digital TechnologyLTD's ROCE has reduced by 83% over the last five years, while the business employed 524% more capital. Usually this isn't ideal, but given Shanghai CDXJ Digital TechnologyLTD conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Shanghai CDXJ Digital TechnologyLTD probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Shanghai CDXJ Digital TechnologyLTD has decreased its current liabilities to 36% 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 CDXJ Digital TechnologyLTD's ROCE

We're a bit apprehensive about Shanghai CDXJ Digital TechnologyLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 20% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Shanghai CDXJ Digital TechnologyLTD we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Shanghai CDXJ Digital TechnologyLTD 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.