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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Shanghai Guangdian Electric Group (SHSE:601616) and its trend of ROCE, we really liked what we saw.

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 Guangdian Electric Group is:

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

0.013 = CN¥34m ÷ (CN¥3.1b - CN¥442m) (Based on the trailing twelve months to September 2024).

So, Shanghai Guangdian Electric Group has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

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

What Does the ROCE Trend For Shanghai Guangdian Electric Group Tell Us?

Shanghai Guangdian Electric Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.3%, which is always encouraging. While returns have increased, the amount of capital employed by Shanghai Guangdian Electric Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

To sum it up, Shanghai Guangdian Electric Group is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 60% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

While Shanghai Guangdian Electric Group 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.