Shanghai QiFan Cable (SHSE:605222) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai QiFan Cable (SHSE:605222), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.088 = CN¥549m ÷ (CN¥14b - CN¥7.5b) (Based on the trailing twelve months to June 2024).

So, Shanghai QiFan Cable has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.9%.

Check out 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?

Unfortunately, the trend isn't great with ROCE falling from 27% five years ago, while capital employed has grown 312%. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shanghai QiFan Cable might not have received a full period of earnings contribution from it.

Another thing to note, Shanghai QiFan Cable has a high ratio of current liabilities to total assets of 54%. 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.

The Key Takeaway

In summary, Shanghai QiFan Cable 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 22% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Shanghai QiFan Cable, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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.