Returns At Shanghai Morn Electric Equipment (SZSE:002451) Are On The Way Up

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shanghai Morn Electric Equipment (SZSE:002451) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Shanghai Morn Electric Equipment is:

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

0.02 = CN¥19m ÷ (CN¥1.7b - CN¥755m) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai Morn Electric Equipment has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

See our latest analysis for Shanghai Morn Electric Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Morn Electric Equipment's ROCE against it's prior returns. If you'd like to look at how Shanghai Morn Electric Equipment has performed in the past in other metrics, you can view this free graph of Shanghai Morn Electric Equipment's past earnings, revenue and cash flow.

What Can We Tell From Shanghai Morn Electric Equipment's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Shanghai Morn Electric Equipment promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 38% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Shanghai Morn Electric Equipment has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shanghai Morn Electric Equipment's ROCE

In summary, we're delighted to see that Shanghai Morn Electric Equipment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 41% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Shanghai Morn Electric Equipment we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.