Slowing Rates Of Return At Shanghai CarthaneLtd (SHSE:603037) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Shanghai CarthaneLtd (SHSE:603037) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai CarthaneLtd, this is the formula:

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

0.11 = CN¥103m ÷ (CN¥1.2b - CN¥254m) (Based on the trailing twelve months to September 2024).

So, Shanghai CarthaneLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

Check out our latest analysis for Shanghai CarthaneLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shanghai CarthaneLtd's past further, check out this free graph covering Shanghai CarthaneLtd's past earnings, revenue and cash flow.

What Can We Tell From Shanghai CarthaneLtd's ROCE Trend?

There hasn't been much to report for Shanghai CarthaneLtd's 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. So don't be surprised if Shanghai CarthaneLtd doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 21% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 21% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

In Conclusion...

In a nutshell, Shanghai CarthaneLtd has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 79% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Shanghai CarthaneLtd, we've discovered 1 warning sign that you should be aware of.

While Shanghai CarthaneLtd 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.