Investors Could Be Concerned With Shareate Tools' (SHSE:688257) Returns On Capital

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. 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 Shareate Tools (SHSE:688257), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Shareate Tools is:

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

0.081 = CN¥207m ÷ (CN¥4.0b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Thus, Shareate Tools has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 5.2% generated by the Machinery industry, it's much better.

Check out our latest analysis for Shareate Tools

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're interested in investigating Shareate Tools' past further, check out this free graph covering Shareate Tools' past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Shareate Tools doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.1% from 25% five years ago. 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.

The Bottom Line On Shareate Tools' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shareate Tools. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Shareate Tools does come with some risks, and we've found 1 warning sign that you should be aware of.

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.