There Are Reasons To Feel Uneasy About China Shipbuilding Industry Group Power's (SHSE:600482) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at China Shipbuilding Industry Group Power (SHSE:600482) 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. The formula for this calculation on China Shipbuilding Industry Group Power is:

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

0.016 = CN¥904m ÷ (CN¥102b - CN¥44b) (Based on the trailing twelve months to June 2024).

Thus, China Shipbuilding Industry Group Power has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for China Shipbuilding Industry Group Power

Above you can see how the current ROCE for China Shipbuilding Industry Group Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Shipbuilding Industry Group Power for free.

What The Trend Of ROCE Can Tell Us

In terms of China Shipbuilding Industry Group Power's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.1% 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. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. 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.

Our Take On China Shipbuilding Industry Group Power's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that China Shipbuilding Industry Group Power is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

China Shipbuilding Industry Group Power could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600482 on our platform quite valuable.

While China Shipbuilding Industry Group Power isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.