The Returns On Capital At Shanghai Sheng Jian Environment Technology (SHSE:603324) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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.

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What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shanghai Sheng Jian Environment Technology is:

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

0.076 = CN¥154m ÷ (CN¥3.7b - CN¥1.7b) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Sheng Jian Environment Technology has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.3% generated by the Machinery industry, it's much better.

Check out our latest analysis for Shanghai Sheng Jian Environment Technology

In the above chart we have measured Shanghai Sheng Jian Environment Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Sheng Jian Environment Technology for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shanghai Sheng Jian Environment Technology, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 7.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shanghai Sheng Jian Environment Technology's current liabilities are still rather high at 46% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

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 Sheng Jian Environment Technology. However, despite the promising trends, the stock has fallen 15% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 2 warning signs for Shanghai Sheng Jian Environment Technology (1 makes us a bit uncomfortable) you should be aware of.

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.