Here's What's Concerning About Shanghai Shuixing Home Textile's (SHSE:603365) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Shanghai Shuixing Home Textile (SHSE:603365) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Shuixing Home Textile:

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

0.12 = CN¥346m ÷ (CN¥3.6b - CN¥648m) (Based on the trailing twelve months to September 2024).

So, Shanghai Shuixing Home Textile has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 6.5% it's much better.

See our latest analysis for Shanghai Shuixing Home Textile

In the above chart we have measured Shanghai Shuixing Home Textile's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Shuixing Home Textile .

What Does the ROCE Trend For Shanghai Shuixing Home Textile Tell Us?

On the surface, the trend of ROCE at Shanghai Shuixing Home Textile doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 12%. However it looks like Shanghai Shuixing Home Textile 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Shanghai Shuixing Home Textile's ROCE

In summary, Shanghai Shuixing Home Textile is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 30% 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 separate note, we've found 2 warning signs for Shanghai Shuixing Home Textile you'll probably want to know about.

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.