Liaoning Shidai WanhengLtd (SHSE:600241) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Liaoning Shidai WanhengLtd (SHSE:600241) 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. Analysts use this formula to calculate it for Liaoning Shidai WanhengLtd:

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

0.037 = CN¥41m ÷ (CN¥1.2b - CN¥148m) (Based on the trailing twelve months to June 2024).

Thus, Liaoning Shidai WanhengLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

Check out our latest analysis for Liaoning Shidai WanhengLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liaoning Shidai WanhengLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Liaoning Shidai WanhengLtd.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Liaoning Shidai WanhengLtd is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.7% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 20%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Liaoning Shidai WanhengLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Liaoning Shidai WanhengLtd's ROCE

In the end, Liaoning Shidai WanhengLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 42% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 600241 on our platform that is definitely worth checking out.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.