There's Been No Shortage Of Growth Recently For Liaoning Shidai WanhengLtd's (SHSE:600241) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Liaoning Shidai WanhengLtd's (SHSE:600241) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Liaoning Shidai WanhengLtd is:

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

0.037 = CN¥39m ÷ (CN¥1.3b - CN¥229m) (Based on the trailing twelve months to September 2023).

Therefore, Liaoning Shidai WanhengLtd has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.6%.

See our latest analysis for Liaoning Shidai WanhengLtd

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'd like to look at how Liaoning Shidai WanhengLtd has performed in the past in other metrics, you can view this free graph of Liaoning Shidai WanhengLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Liaoning Shidai WanhengLtd Tell Us?

It's great to see that Liaoning Shidai WanhengLtd has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 33% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Liaoning Shidai WanhengLtd's ROCE

In summary, it's great to see that Liaoning Shidai WanhengLtd has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 18% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for Liaoning Shidai WanhengLtd that we think you should be aware of.

While Liaoning Shidai WanhengLtd 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.