Shanghai Sheng Jian Environment Technology (SHSE:603324) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Shanghai Sheng Jian Environment Technology (SHSE:603324) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Sheng Jian Environment Technology, this is the formula:

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

0.077 = CN¥117m ÷ (CN¥3.1b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

So, Shanghai Sheng Jian Environment Technology has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.0%.

Check out our latest analysis for Shanghai Sheng Jian Environment Technology

Above you can see how the current ROCE for Shanghai Sheng Jian Environment Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Sheng Jian Environment Technology .

What Does the ROCE Trend For Shanghai Sheng Jian Environment Technology Tell Us?

On the surface, the trend of ROCE at Shanghai Sheng Jian Environment Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.7% from 28% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Shanghai Sheng Jian Environment Technology has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, Shanghai Sheng Jian Environment Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Shanghai Sheng Jian Environment Technology (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Shanghai Sheng Jian Environment Technology 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.