Here's What To Make Of Sichuan Langsha Holding's (SHSE:600137) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 investigating Sichuan Langsha Holding (SHSE:600137), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Sichuan Langsha Holding is:

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

0.044 = CN¥24m ÷ (CN¥663m - CN¥129m) (Based on the trailing twelve months to September 2024).

Thus, Sichuan Langsha Holding has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

Check out our latest analysis for Sichuan Langsha Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Langsha Holding's ROCE against it's prior returns. If you'd like to look at how Sichuan Langsha Holding has performed in the past in other metrics, you can view this free graph of Sichuan Langsha Holding's past earnings, revenue and cash flow.

What Does the ROCE Trend For Sichuan Langsha Holding Tell Us?

There hasn't been much to report for Sichuan Langsha Holding's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Sichuan Langsha Holding doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Sichuan Langsha Holding's ROCE

In a nutshell, Sichuan Langsha Holding has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Sichuan Langsha Holding that we think you should be aware of.

While Sichuan Langsha Holding 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.