Shanghai Laimu ElectronicsLtd (SHSE:603633) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think Shanghai Laimu ElectronicsLtd (SHSE:603633) 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. Analysts use this formula to calculate it for Shanghai Laimu ElectronicsLtd:

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

0.047 = CN¥99m ÷ (CN¥3.2b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai Laimu ElectronicsLtd has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.6%.

See our latest analysis for Shanghai Laimu ElectronicsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Laimu ElectronicsLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Shanghai Laimu ElectronicsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.7% from 9.0% five years ago. 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.

Our Take On Shanghai Laimu ElectronicsLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai Laimu ElectronicsLtd is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 12% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shanghai Laimu ElectronicsLtd (of which 1 is concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.