There Are Reasons To Feel Uneasy About Shanghai National Center of Testing and Inspection for Electric Cable and Wire's (SZSE:301289) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shanghai National Center of Testing and Inspection for Electric Cable and Wire (SZSE:301289) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.071 = CN¥81m ÷ (CN¥1.2b - CN¥120m) (Based on the trailing twelve months to June 2024).

So, Shanghai National Center of Testing and Inspection for Electric Cable and Wire has an ROCE of 7.1%. On its own, that's a low figure but it's around the 6.1% average generated by the Professional Services industry.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai National Center of Testing and Inspection for Electric Cable and Wire's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai National Center of Testing and Inspection for Electric Cable and Wire.

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. Around five years ago the returns on capital were 22%, but since then they've fallen to 7.1%. However it looks like Shanghai National Center of Testing and Inspection for Electric Cable and Wire 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 National Center of Testing and Inspection for Electric Cable and Wire's ROCE

In summary, Shanghai National Center of Testing and Inspection for Electric Cable and Wire is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Shanghai National Center of Testing and Inspection for Electric Cable and Wire and understanding this should be part of your investment process.

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.