Shanghai Hugong Electric GroupLtd (SHSE:603131) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 investigating Shanghai Hugong Electric GroupLtd (SHSE:603131), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Shanghai Hugong Electric GroupLtd:

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

0.023 = CN¥39m ÷ (CN¥2.1b - CN¥443m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Hugong Electric GroupLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.9%.

Check out our latest analysis for Shanghai Hugong Electric GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Hugong Electric GroupLtd's ROCE against it's prior returns. If you'd like to look at how Shanghai Hugong Electric GroupLtd has performed in the past in other metrics, you can view this free graph of Shanghai Hugong Electric GroupLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Shanghai Hugong Electric GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 6.4% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Shanghai Hugong Electric GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 9.1% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know about the risks facing Shanghai Hugong Electric GroupLtd, we've discovered 2 warning signs that you should be aware of.

While Shanghai Hugong Electric GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.