Here's What's Concerning About Shanghai Waigaoqiao Free Trade Zone Group's (SHSE:600648) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shanghai Waigaoqiao Free Trade Zone Group (SHSE:600648), it didn't seem to tick all of these boxes.

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. To calculate this metric for Shanghai Waigaoqiao Free Trade Zone Group, this is the formula:

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

0.059 = CN¥1.4b ÷ (CN¥44b - CN¥20b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Waigaoqiao Free Trade Zone Group has an ROCE of 5.9%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

View our latest analysis for Shanghai Waigaoqiao Free Trade Zone Group

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Waigaoqiao Free Trade Zone Group.

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai Waigaoqiao Free Trade Zone Group doesn't inspire confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 5.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Shanghai Waigaoqiao Free Trade Zone Group has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shanghai Waigaoqiao Free Trade Zone Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai Waigaoqiao Free Trade Zone Group. However, despite the promising trends, the stock has fallen 41% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Shanghai Waigaoqiao Free Trade Zone Group, we've spotted 2 warning signs, and 1 of them is significant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com