Returns On Capital At Shanghai SK Petroleum & Chemical Equipment (SZSE:002278) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Shanghai SK Petroleum & Chemical Equipment (SZSE:002278) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Shanghai SK Petroleum & Chemical Equipment:

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

0.031 = CN¥39m ÷ (CN¥1.8b - CN¥594m) (Based on the trailing twelve months to September 2024).

So, Shanghai SK Petroleum & Chemical Equipment has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.2%.

See our latest analysis for Shanghai SK Petroleum & Chemical Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai SK Petroleum & Chemical Equipment's ROCE against it's prior returns. If you'd like to look at how Shanghai SK Petroleum & Chemical Equipment has performed in the past in other metrics, you can view this free graph of Shanghai SK Petroleum & Chemical Equipment's past earnings, revenue and cash flow.

How Are Returns Trending?

There hasn't been much to report for Shanghai SK Petroleum & Chemical Equipment's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Shanghai SK Petroleum & Chemical Equipment in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

In summary, Shanghai SK Petroleum & Chemical Equipment isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Shanghai SK Petroleum & Chemical Equipment (including 1 which can't be ignored) .

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.