Returns On Capital At Shanghai Liangxin ElectricalLTD (SZSE:002706) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Shanghai Liangxin ElectricalLTD (SZSE:002706) looks decent, right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for Shanghai Liangxin ElectricalLTD:

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

0.14 = CN¥573m ÷ (CN¥5.8b - CN¥1.6b) (Based on the trailing twelve months to December 2023).

Therefore, Shanghai Liangxin ElectricalLTD has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Electrical industry.

See our latest analysis for Shanghai Liangxin ElectricalLTD

Above you can see how the current ROCE for Shanghai Liangxin ElectricalLTD 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 Liangxin ElectricalLTD .

What Can We Tell From Shanghai Liangxin ElectricalLTD's ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 137% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

In the end, Shanghai Liangxin ElectricalLTD has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Shanghai Liangxin ElectricalLTD could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002706 on our platform quite valuable.

While Shanghai Liangxin ElectricalLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.