Returns On Capital At Songcheng Performance DevelopmentLtd (SZSE:300144) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Songcheng Performance DevelopmentLtd (SZSE:300144), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Songcheng Performance DevelopmentLtd is:

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

0.14 = CN¥1.2b ÷ (CN¥9.4b - CN¥785m) (Based on the trailing twelve months to March 2024).

Thus, Songcheng Performance DevelopmentLtd has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 11% it's much better.

View 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, you can check out the forecasts from the analysts covering Songcheng Performance DevelopmentLtd for free.

How Are Returns Trending?

Over the past five years, Songcheng Performance DevelopmentLtd's ROCE has remained relatively flat while the business is using 22% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. So if this trend continues, don't be surprised if the business is smaller in a few years time.

The Key Takeaway

Overall, we're not ecstatic to see Songcheng Performance DevelopmentLtd reducing the amount of capital it employs in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. 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.

On a final note, we've found 3 warning signs for Songcheng Performance DevelopmentLtd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.