Some Investors May Be Worried About Shanghai Bailian (Group)'s (SHSE:600827) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shanghai Bailian (Group) (SHSE:600827), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Shanghai Bailian (Group) is:

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

0.011 = CN¥339m ÷ (CN¥55b - CN¥25b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Bailian (Group) has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 6.4%.

Check out our latest analysis for Shanghai Bailian (Group)

Above you can see how the current ROCE for Shanghai Bailian (Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Bailian (Group) .

What Does the ROCE Trend For Shanghai Bailian (Group) Tell Us?

On the surface, the trend of ROCE at Shanghai Bailian (Group) doesn't inspire confidence. To be more specific, ROCE has fallen from 4.0% over the last five years. However it looks like Shanghai Bailian (Group) 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.

Another thing to note, Shanghai Bailian (Group) has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shanghai Bailian (Group)'s reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 12% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Shanghai Bailian (Group) does have some risks though, and we've spotted 2 warning signs for Shanghai Bailian (Group) that you might be interested in.

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.