Shanghai Challenge TextileLtd (SZSE:002486) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Shanghai Challenge TextileLtd (SZSE:002486) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Shanghai Challenge TextileLtd is:

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

0.02 = CN¥22m ÷ (CN¥1.3b - CN¥190m) (Based on the trailing twelve months to September 2024).

So, Shanghai Challenge TextileLtd has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.5%.

Check out our latest analysis for Shanghai Challenge TextileLtd

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

What Can We Tell From Shanghai Challenge TextileLtd's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Shanghai Challenge TextileLtd promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 221% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

To sum it up, Shanghai Challenge TextileLtd is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 25% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 1 warning sign with Shanghai Challenge TextileLtd and understanding it should be part of your investment process.

While Shanghai Challenge TextileLtd 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.