Shanghai Liangxin ElectricalLTD (SZSE:002706) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Shanghai Liangxin ElectricalLTD (SZSE:002706) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.099 = CN¥412m ÷ (CN¥5.5b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

So, Shanghai Liangxin ElectricalLTD has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.9%.

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're interested, you can view the analysts predictions in our free analyst report for Shanghai Liangxin ElectricalLTD .

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

When we looked at the ROCE trend at Shanghai Liangxin ElectricalLTD, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Shanghai Liangxin ElectricalLTD is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

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

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.