We Like These Underlying Return On Capital Trends At Shanghai Bairun Investment Holding Group (SZSE:002568)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Shanghai Bairun Investment Holding Group (SZSE:002568) and its trend of ROCE, we really liked what we saw.

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 Shanghai Bairun Investment Holding Group is:

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

0.18 = CN¥945m ÷ (CN¥7.1b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Bairun Investment Holding Group has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 17%.

Check out our latest analysis for Shanghai Bairun Investment Holding Group

In the above chart we have measured Shanghai Bairun Investment Holding Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Bairun Investment Holding Group for free.

What Does the ROCE Trend For Shanghai Bairun Investment Holding Group Tell Us?

Investors would be pleased with what's happening at Shanghai Bairun Investment Holding Group. The data shows that returns on capital have increased substantially over the last five years to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 163%. So we're very much inspired by what we're seeing at Shanghai Bairun Investment Holding Group thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 26% of the business, which is more than it was five years ago. 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

To sum it up, Shanghai Bairun Investment Holding Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 108% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Shanghai Bairun Investment Holding Group can keep these trends up, it could have a bright future ahead.

Shanghai Bairun Investment Holding Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

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