Shanghai QiFan Cable (SHSE:605222) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Shanghai QiFan Cable (SHSE:605222) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai QiFan Cable, this is the formula:

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

0.063 = CN¥415m ÷ (CN¥14b - CN¥7.7b) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai QiFan Cable has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.

See our latest analysis for Shanghai QiFan Cable

In the above chart we have measured Shanghai QiFan Cable's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai QiFan Cable .

What Does the ROCE Trend For Shanghai QiFan Cable Tell Us?

We weren't thrilled with the trend because Shanghai QiFan Cable's ROCE has reduced by 77% over the last five years, while the business employed 314% more capital. That being said, Shanghai QiFan Cable raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shanghai QiFan Cable probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, Shanghai QiFan Cable has a high ratio of current liabilities to total assets of 54%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To conclude, we've found that Shanghai QiFan Cable is reinvesting in the business, but returns have been falling. Since the stock has declined 14% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shanghai QiFan Cable has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Shanghai QiFan Cable (1 is a bit unpleasant) you should be aware of.

While Shanghai QiFan Cable 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.