The Returns On Capital At Shanghai Kindly Enterprise Development GroupLTD (SHSE:603987) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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 briefly looking over the numbers, we don't think Shanghai Kindly Enterprise Development GroupLTD (SHSE:603987) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanghai Kindly Enterprise Development GroupLTD, this is the formula:

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

0.071 = CN¥210m ÷ (CN¥4.1b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

So, Shanghai Kindly Enterprise Development GroupLTD has an ROCE of 7.1%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 5.8%.

See our latest analysis for Shanghai Kindly Enterprise Development GroupLTD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Kindly Enterprise Development GroupLTD.

How Are Returns Trending?

On the surface, the trend of ROCE at Shanghai Kindly Enterprise Development GroupLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Shanghai Kindly Enterprise Development GroupLTD's ROCE

We're a bit apprehensive about Shanghai Kindly Enterprise Development GroupLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 12% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Shanghai Kindly Enterprise Development GroupLTD you'll probably want to know about.

While Shanghai Kindly Enterprise Development GroupLTD 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.