Some Investors May Be Worried About Shandong Nanshan Fashion Sci-Tech's (SZSE:300918) 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shandong Nanshan Fashion Sci-Tech (SZSE:300918), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shandong Nanshan Fashion Sci-Tech is:

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

0.088 = CN¥238m ÷ (CN¥3.9b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Therefore, Shandong Nanshan Fashion Sci-Tech has an ROCE of 8.8%. On its own that's a low return, but compared to the average of 6.1% generated by the Luxury industry, it's much better.

View our latest analysis for Shandong Nanshan Fashion Sci-Tech

In the above chart we have measured Shandong Nanshan Fashion Sci-Tech'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 Shandong Nanshan Fashion Sci-Tech .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 17% five years ago, while capital employed has grown 172%. That being said, Shandong Nanshan Fashion Sci-Tech raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Shandong Nanshan Fashion Sci-Tech probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Shandong Nanshan Fashion Sci-Tech has done well to pay down its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Shandong Nanshan Fashion Sci-Tech is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Shandong Nanshan Fashion Sci-Tech (including 1 which doesn't sit too well with us) .

While Shandong Nanshan Fashion Sci-Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.