The Returns At Shanghai Tongji Science&Technology IndustrialLtd (SHSE:600846) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shanghai Tongji Science&Technology IndustrialLtd (SHSE:600846) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Shanghai Tongji Science&Technology IndustrialLtd is:

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

0.057 = CN¥227m ÷ (CN¥9.4b - CN¥5.4b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Tongji Science&Technology IndustrialLtd has an ROCE of 5.7%. On its own, that's a low figure but it's around the 6.5% average generated by the Construction industry.

Check out our latest analysis for Shanghai Tongji Science&Technology IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Tongji Science&Technology IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Shanghai Tongji Science&Technology IndustrialLtd's past further, check out this free graph covering Shanghai Tongji Science&Technology IndustrialLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Tongji Science&Technology IndustrialLtd Tell Us?

Over the past five years, Shanghai Tongji Science&Technology IndustrialLtd's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Shanghai Tongji Science&Technology IndustrialLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Shanghai Tongji Science&Technology IndustrialLtd's current liabilities are still rather high at 57% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shanghai Tongji Science&Technology IndustrialLtd's ROCE

In summary, Shanghai Tongji Science&Technology IndustrialLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know more about Shanghai Tongji Science&Technology IndustrialLtd, we've spotted 3 warning signs, and 2 of them are a bit concerning.

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.