Shanghai Nenghui TechnologyLtd (SZSE:301046) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai Nenghui TechnologyLtd (SZSE:301046), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Nenghui TechnologyLtd, this is the formula:

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

0.025 = CN¥31m ÷ (CN¥1.7b - CN¥455m) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai Nenghui TechnologyLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.0%.

Check out our latest analysis for Shanghai Nenghui TechnologyLtd

Above you can see how the current ROCE for Shanghai Nenghui TechnologyLtd 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 Nenghui TechnologyLtd .

So How Is Shanghai Nenghui TechnologyLtd's ROCE Trending?

We weren't thrilled with the trend because Shanghai Nenghui TechnologyLtd's ROCE has reduced by 65% over the last five years, while the business employed 204% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Shanghai Nenghui TechnologyLtd's earnings and if they change as a result from the capital raise.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai Nenghui TechnologyLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 46% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Shanghai Nenghui TechnologyLtd (at least 1 which is potentially serious) , and understanding these would certainly be useful.

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.