Returns On Capital Signal Tricky Times Ahead For Shanghai Emperor of Cleaning Hi-Tech (SHSE:603200)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after investigating Shanghai Emperor of Cleaning Hi-Tech (SHSE:603200), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai Emperor of Cleaning Hi-Tech is:

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

0.045 = CN¥47m ÷ (CN¥1.5b - CN¥446m) (Based on the trailing twelve months to March 2024).

So, Shanghai Emperor of Cleaning Hi-Tech has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.7%.

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

Above you can see how the current ROCE for Shanghai Emperor of Cleaning Hi-Tech 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 Emperor of Cleaning Hi-Tech .

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

In terms of Shanghai Emperor of Cleaning Hi-Tech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.5% from 8.5% 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.

Our Take On 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. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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.

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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.