Shanghai Ruking Technologies' (SZSE:301525) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Shanghai Ruking Technologies (SZSE:301525) and its ROCE trend, we weren't exactly thrilled.

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 Ruking Technologies is:

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

0.042 = CN¥134m ÷ (CN¥3.9b - CN¥706m) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Ruking Technologies has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

Check out our latest analysis for Shanghai Ruking Technologies

Above you can see how the current ROCE for Shanghai Ruking Technologies 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 Ruking Technologies .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Shanghai Ruking Technologies. Over the past five years, ROCE has remained relatively flat at around 4.2% and the business has deployed 608% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Shanghai Ruking Technologies has done well to reduce current liabilities to 18% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Shanghai Ruking Technologies' ROCE

Long story short, while Shanghai Ruking Technologies has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last year. Therefore based on the analysis done in this article, we don't think Shanghai Ruking Technologies has the makings of a multi-bagger.

Shanghai Ruking Technologies does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Shanghai Ruking Technologies 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.