Shanghai NAR Industrial (SZSE:002825) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think Shanghai NAR Industrial (SZSE:002825) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shanghai NAR Industrial is:

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

0.028 = CN¥47m ÷ (CN¥2.5b - CN¥791m) (Based on the trailing twelve months to June 2024).

Thus, Shanghai NAR Industrial has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

See our latest analysis for Shanghai NAR Industrial

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai NAR Industrial.

What Can We Tell From Shanghai NAR Industrial's ROCE Trend?

In terms of Shanghai NAR Industrial's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.8% from 8.1% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Shanghai NAR Industrial is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 4.8% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Shanghai NAR Industrial could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002825 on our platform quite valuable.

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.