Here's What To Make Of Sanjiang Shopping ClubLtd's (SHSE:601116) Decelerating Rates Of Return

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Sanjiang Shopping ClubLtd (SHSE:601116) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sanjiang Shopping ClubLtd:

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

0.025 = CN¥87m ÷ (CN¥5.0b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Thus, Sanjiang Shopping ClubLtd has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 6.0%.

Check out our latest analysis for Sanjiang Shopping ClubLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sanjiang Shopping ClubLtd has performed in the past in other metrics, you can view this free graph of Sanjiang Shopping ClubLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, Sanjiang Shopping ClubLtd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Sanjiang Shopping ClubLtd doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In summary, Sanjiang Shopping ClubLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 1 warning sign for Sanjiang Shopping ClubLtd that we think you should be aware of.

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.