Investors Met With Slowing Returns on Capital At Songcheng Performance DevelopmentLtd (SZSE:300144)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Songcheng Performance DevelopmentLtd (SZSE:300144) 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. To calculate this metric for Songcheng Performance DevelopmentLtd, this is the formula:

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

0.15 = CN¥1.3b ÷ (CN¥9.3b - CN¥663m) (Based on the trailing twelve months to June 2024).

Therefore, Songcheng Performance DevelopmentLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 11% it's much better.

See our latest analysis for Songcheng Performance DevelopmentLtd

Above you can see how the current ROCE for Songcheng Performance DevelopmentLtd 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 Songcheng Performance DevelopmentLtd .

How Are Returns Trending?

There hasn't been much to report for Songcheng Performance DevelopmentLtd's returns and its level of capital employed because both metrics have been steady for the past five years. 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Songcheng Performance DevelopmentLtd to be a multi-bagger going forward.

The Key Takeaway

We can conclude that in regards to Songcheng Performance DevelopmentLtd's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 37% 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.

Songcheng Performance DevelopmentLtd does have some risks though, and we've spotted 4 warning signs for Songcheng Performance DevelopmentLtd that you might be interested in.

While Songcheng Performance DevelopmentLtd 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.