Shenzhen Quanxinhao (SZSE:000007) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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, we've noticed some promising trends at Shenzhen Quanxinhao (SZSE:000007) so let's look a bit deeper.

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 Shenzhen Quanxinhao, this is the formula:

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

0.08 = CN¥17m ÷ (CN¥332m - CN¥126m) (Based on the trailing twelve months to September 2024).

So, Shenzhen Quanxinhao has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Hospitality industry average of 8.7%.

Check out our latest analysis for Shenzhen Quanxinhao

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Quanxinhao's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shenzhen Quanxinhao.

What Does the ROCE Trend For Shenzhen Quanxinhao Tell Us?

We're delighted to see that Shenzhen Quanxinhao is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 8.0% which is no doubt a relief for some early shareholders. In regards to capital employed, Shenzhen Quanxinhao is using 35% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

From what we've seen above, Shenzhen Quanxinhao has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

While Shenzhen Quanxinhao looks impressive, no company is worth an infinite price. The intrinsic value infographic for 000007 helps visualize whether it is currently trading for a fair price.

While Shenzhen Quanxinhao 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.