Shengyuan Environmental ProtectionLtd (SZSE:300867) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Shengyuan Environmental ProtectionLtd (SZSE:300867), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Shengyuan Environmental ProtectionLtd, this is the formula:

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

0.056 = CN¥385m ÷ (CN¥8.5b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

Therefore, Shengyuan Environmental ProtectionLtd has an ROCE of 5.6%. On its own, that's a low figure but it's around the 4.8% average generated by the Commercial Services industry.

See our latest analysis for Shengyuan Environmental ProtectionLtd

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'd like to look at how Shengyuan Environmental ProtectionLtd has performed in the past in other metrics, you can view this free graph of Shengyuan Environmental ProtectionLtd's past earnings, revenue and cash flow.

So How Is Shengyuan Environmental ProtectionLtd's ROCE Trending?

When we looked at the ROCE trend at Shengyuan Environmental ProtectionLtd, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.6%. However it looks like Shengyuan Environmental ProtectionLtd 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.

What We Can Learn From Shengyuan Environmental ProtectionLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shengyuan Environmental ProtectionLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 62% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Shengyuan Environmental ProtectionLtd that you might find interesting.

While Shengyuan Environmental ProtectionLtd 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.