Be Wary Of Shanghai Emperor of Cleaning Hi-Tech (SHSE:603200) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanghai Emperor of Cleaning Hi-Tech (SHSE:603200), it didn't seem to tick all of these boxes.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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 Emperor of Cleaning Hi-Tech:

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

0.048 = CN¥52m ÷ (CN¥1.6b - CN¥518m) (Based on the trailing twelve months to September 2024).

So, Shanghai Emperor of Cleaning Hi-Tech has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

Check out our latest analysis for Shanghai Emperor of Cleaning Hi-Tech

In the above chart we have measured Shanghai Emperor of Cleaning Hi-Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Emperor of Cleaning Hi-Tech .

What Does the ROCE Trend For Shanghai Emperor of Cleaning Hi-Tech Tell Us?

When we looked at the ROCE trend at Shanghai Emperor of Cleaning Hi-Tech, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.8% from 7.3% five years ago. However it looks like Shanghai Emperor of Cleaning Hi-Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Shanghai Emperor of Cleaning Hi-Tech's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Shanghai Emperor of Cleaning Hi-Tech's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Emperor of Cleaning Hi-Tech's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 1 warning sign for Shanghai Emperor of Cleaning Hi-Tech you'll probably want to know about.

While Shanghai Emperor of Cleaning Hi-Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.