Investors Could Be Concerned With Shanghai Rongtai Health Technology's (SHSE:603579) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shanghai Rongtai Health Technology (SHSE:603579), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Rongtai Health Technology, this is the formula:

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

0.067 = CN¥181m ÷ (CN¥3.4b - CN¥721m) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Rongtai Health Technology has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Leisure industry average of 5.3%.

Check out our latest analysis for Shanghai Rongtai Health Technology

In the above chart we have measured Shanghai Rongtai Health Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Rongtai Health Technology .

What Does the ROCE Trend For Shanghai Rongtai Health Technology Tell Us?

When we looked at the ROCE trend at Shanghai Rongtai Health Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.7% from 14% five years ago. However it looks like Shanghai Rongtai Health Technology 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.

The Bottom Line

In summary, Shanghai Rongtai Health Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 15% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Shanghai Rongtai Health Technology does have some risks though, and we've spotted 1 warning sign for Shanghai Rongtai Health Technology that you might be interested in.

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.