Returns On Capital Are A Standout For Shanghai Yaoji Technology (SZSE:002605)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Shanghai Yaoji Technology (SZSE:002605) looks great, so lets see what the trend can tell us.

What Is 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 Yaoji Technology, this is the formula:

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

0.27 = CN¥911m ÷ (CN¥4.6b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

Thus, Shanghai Yaoji Technology has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Leisure industry average of 6.4%.

See our latest analysis for Shanghai Yaoji Technology

In the above chart we have measured Shanghai Yaoji 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 Yaoji Technology .

What Does the ROCE Trend For Shanghai Yaoji Technology Tell Us?

We like the trends that we're seeing from Shanghai Yaoji Technology. Over the last five years, returns on capital employed have risen substantially to 27%. Basically the business is earning more per dollar of capital invested and in addition to that, 100% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Shanghai Yaoji Technology's ROCE

All in all, it's terrific to see that Shanghai Yaoji Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 117% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Shanghai Yaoji Technology you'll probably want to know about.

Shanghai Yaoji Technology is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.