Returns Are Gaining Momentum At Shanghai Yanhua Smartech Group (SZSE:002178)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shanghai Yanhua Smartech Group (SZSE:002178) looks quite promising in regards to its trends of return on capital.

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

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. Analysts use this formula to calculate it for Shanghai Yanhua Smartech Group:

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

0.0031 = CN¥2.2m ÷ (CN¥1.5b - CN¥822m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Yanhua Smartech Group has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.

See our latest analysis for Shanghai Yanhua Smartech Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Yanhua Smartech Group's ROCE against it's prior returns. If you're interested in investigating Shanghai Yanhua Smartech Group's past further, check out this free graph covering Shanghai Yanhua Smartech Group's past earnings, revenue and cash flow.

So How Is Shanghai Yanhua Smartech Group's ROCE Trending?

It's great to see that Shanghai Yanhua Smartech Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.3% which is no doubt a relief for some early shareholders. In regards to capital employed, Shanghai Yanhua Smartech Group is using 29% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

Another thing to note, Shanghai Yanhua Smartech Group has a high ratio of current liabilities to total assets of 53%. 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.

The Key Takeaway

In summary, it's great to see that Shanghai Yanhua Smartech Group has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 13% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

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

While Shanghai Yanhua Smartech Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com