Shanghai Challenge TextileLtd's (SZSE:002486) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shanghai Challenge TextileLtd (SZSE:002486) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Shanghai Challenge TextileLtd, this is the formula:

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

0.055 = CN¥60m ÷ (CN¥1.3b - CN¥180m) (Based on the trailing twelve months to September 2023).

Thus, Shanghai Challenge TextileLtd has an ROCE of 5.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

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're interested in investigating Shanghai Challenge TextileLtd's past further, check out this free graph covering Shanghai Challenge TextileLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Shanghai Challenge TextileLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.5%, which is always encouraging. While returns have increased, the amount of capital employed by Shanghai Challenge TextileLtd 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Shanghai Challenge TextileLtd's ROCE

To sum it up, Shanghai Challenge TextileLtd is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 43% 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.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 002486 that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.