The Returns On Capital At Shanghai Bailian (Group) (SHSE:600827) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shanghai Bailian (Group) (SHSE:600827), it didn't seem to tick all of these boxes.

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 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).

Therefore, 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%.

View our latest analysis for Shanghai Bailian (Group)

In the above chart we have measured Shanghai Bailian (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shanghai Bailian (Group)'s current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To conclude, we've found that Shanghai Bailian (Group) 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 0.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Shanghai Bailian (Group) does come with some risks, and we've found 2 warning signs that you should be aware of.

While Shanghai Bailian (Group) 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.