Returns At Shanghai Sanmao Enterprise (Group) (SHSE:600689) Are On The Way Up

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shanghai Sanmao Enterprise (Group) (SHSE:600689) looks quite promising in regards to its trends of return on capital.

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 Shanghai Sanmao Enterprise (Group), this is the formula:

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

0.0052 = CN¥2.6m ÷ (CN¥852m - CN¥366m) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai Sanmao Enterprise (Group) has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.1%.

Check out our latest analysis for Shanghai Sanmao Enterprise (Group)

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 Sanmao Enterprise (Group).

The Trend Of ROCE

Shareholders will be relieved that Shanghai Sanmao Enterprise (Group) has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.5% on its capital. While returns have increased, the amount of capital employed by Shanghai Sanmao Enterprise (Group) has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 43% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Shanghai Sanmao Enterprise (Group)'s ROCE

To bring it all together, Shanghai Sanmao Enterprise (Group) has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 16% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for Shanghai Sanmao Enterprise (Group) that we think you should be aware of.

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.