Returns On Capital Signal Tricky Times Ahead For Shanghai M&G Stationery (SHSE:603899)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Shanghai M&G Stationery (SHSE:603899) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 M&G Stationery is:

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

0.19 = CN¥1.7b ÷ (CN¥15b - CN¥5.7b) (Based on the trailing twelve months to June 2024).

Thus, Shanghai M&G Stationery has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 5.6% it's much better.

See our latest analysis for Shanghai M&G Stationery

In the above chart we have measured Shanghai M&G Stationery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai M&G Stationery for free.

What Does the ROCE Trend For Shanghai M&G Stationery Tell Us?

When we looked at the ROCE trend at Shanghai M&G Stationery, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Shanghai M&G Stationery's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai M&G Stationery is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 33% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Shanghai M&G Stationery you'll probably want to know about.

While Shanghai M&G Stationery 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.