Here's What's Concerning About Shanghai Luoman Technologies' (SHSE:605289) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanghai Luoman Technologies (SHSE:605289), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Luoman Technologies, this is the formula:

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

0.015 = CN¥22m ÷ (CN¥2.6b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Luoman Technologies has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.1%.

Check out our latest analysis for Shanghai Luoman Technologies

Above you can see how the current ROCE for Shanghai Luoman Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Luoman Technologies .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shanghai Luoman Technologies doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 1.5%. 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.

Another thing to note, Shanghai Luoman Technologies has a high ratio of current liabilities to total assets of 41%. 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.

The Key Takeaway

To conclude, we've found that Shanghai Luoman Technologies is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 12% over the last three years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Shanghai Luoman Technologies does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

While Shanghai Luoman Technologies 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.