Returns On Capital At Shanghai Pudong ConstructionLtd (SHSE:600284) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shanghai Pudong ConstructionLtd (SHSE:600284) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Shanghai Pudong ConstructionLtd, this is the formula:

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

0.032 = CN¥353m ÷ (CN¥29b - CN¥18b) (Based on the trailing twelve months to March 2024).

Therefore, Shanghai Pudong ConstructionLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.4%.

See our latest analysis for Shanghai Pudong ConstructionLtd

Above you can see how the current ROCE for Shanghai Pudong ConstructionLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Pudong ConstructionLtd .

So How Is Shanghai Pudong ConstructionLtd's ROCE Trending?

In terms of Shanghai Pudong ConstructionLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shanghai Pudong ConstructionLtd's current liabilities have increased over the last five years to 62% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Shanghai Pudong ConstructionLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai Pudong ConstructionLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 0.8% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Shanghai Pudong ConstructionLtd, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.