Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shanghai Industrial Holdings (HKG:363) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shanghai Industrial Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = HK$9.9b ÷ (HK$179b - HK$47b) (Based on the trailing twelve months to December 2023).
Thus, Shanghai Industrial Holdings has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 2.9% generated by the Industrials industry, it's much better.
In the above chart we have measured Shanghai Industrial Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Industrial Holdings for free.
The Trend Of ROCE
There hasn't been much to report for Shanghai Industrial Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Shanghai Industrial Holdings to be a multi-bagger going forward.
The Bottom Line On Shanghai Industrial Holdings' ROCE
In summary, Shanghai Industrial Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing: We've identified 2 warning signs with Shanghai Industrial Holdings (at least 1 which is concerning) , and understanding these would certainly be useful.
While Shanghai Industrial Holdings 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.