The Return Trends At Shanghai Sanmao Enterprise (Group) (SHSE:600689) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Shanghai Sanmao Enterprise (Group)'s (SHSE:600689) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Sanmao Enterprise (Group):

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

0.017 = CN¥8.0m ÷ (CN¥809m - CN¥328m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Sanmao Enterprise (Group) has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.6%.

See 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

While there are companies with higher returns on capital out there, we still find the trend at Shanghai Sanmao Enterprise (Group) promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 313% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

To bring it all together, Shanghai Sanmao Enterprise (Group) has done well to increase the returns it's generating from its capital employed. Given the stock has declined 34% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 1 warning sign with Shanghai Sanmao Enterprise (Group) and understanding it should be part of your investment process.

While Shanghai Sanmao Enterprise (Group) 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.