Shanghai Guangdian Electric Group (SHSE:601616) Is Experiencing Growth In 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? 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. Speaking of which, we noticed some great changes in Shanghai Guangdian Electric Group's (SHSE:601616) returns on capital, so let's have a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shanghai Guangdian Electric Group, this is the formula:

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

0.003 = CN¥8.0m ÷ (CN¥3.1b - CN¥494m) (Based on the trailing twelve months to June 2024).

Thus, Shanghai Guangdian Electric Group has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

Check out our latest analysis for Shanghai Guangdian Electric Group

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

So How Is Shanghai Guangdian Electric Group's ROCE Trending?

We're delighted to see that Shanghai Guangdian Electric Group is reaping rewards from its investments and has now broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Shanghai Guangdian Electric Group's ROCE

In summary, we're delighted to see that Shanghai Guangdian Electric Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing: We've identified 3 warning signs with Shanghai Guangdian Electric Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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.