Shanghai National Center of Testing and Inspection for Electric Cable and Wire (SZSE:301289) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shanghai National Center of Testing and Inspection for Electric Cable and Wire (SZSE:301289) 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)?

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 National Center of Testing and Inspection for Electric Cable and Wire:

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

0.075 = CN¥83m ÷ (CN¥1.2b - CN¥90m) (Based on the trailing twelve months to September 2023).

So, Shanghai National Center of Testing and Inspection for Electric Cable and Wire has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Professional Services industry average of 5.6%.

Check out our latest analysis for Shanghai National Center of Testing and Inspection for Electric Cable and Wire

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're interested in investigating Shanghai National Center of Testing and Inspection for Electric Cable and Wire's past further, check out this free graph covering Shanghai National Center of Testing and Inspection for Electric Cable and Wire's past earnings, revenue and cash flow.

What Can We Tell From Shanghai National Center of Testing and Inspection for Electric Cable and Wire's ROCE Trend?

When we looked at the ROCE trend at Shanghai National Center of Testing and Inspection for Electric Cable and Wire, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last four years. 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.

What We Can Learn From Shanghai National Center of Testing and Inspection for Electric Cable and Wire's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shanghai National Center of Testing and Inspection for Electric Cable and Wire. Furthermore the stock has climbed 40% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing Shanghai National Center of Testing and Inspection for Electric Cable and Wire, we've discovered 2 warning signs that you should be aware of.

While Shanghai National Center of Testing and Inspection for Electric Cable and Wire 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.