We Like These Underlying Return On Capital Trends At Shanghai Rendu Biotechnology (SHSE:688193)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Shanghai Rendu Biotechnology's (SHSE:688193) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Rendu Biotechnology:

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

0.000076 = CN¥75k ÷ (CN¥1.0b - CN¥66m) (Based on the trailing twelve months to December 2023).

So, Shanghai Rendu Biotechnology has an ROCE of 0.008%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.5%.

View our latest analysis for Shanghai Rendu Biotechnology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Rendu Biotechnology's ROCE against it's prior returns. If you're interested in investigating Shanghai Rendu Biotechnology's past further, check out this free graph covering Shanghai Rendu Biotechnology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Rendu Biotechnology Tell Us?

The fact that Shanghai Rendu Biotechnology is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 0.008% on its capital. Not only that, but the company is utilizing 559% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Shanghai Rendu Biotechnology has decreased current liabilities to 6.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Shanghai Rendu Biotechnology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Shanghai Rendu Biotechnology's ROCE

To the delight of most shareholders, Shanghai Rendu Biotechnology has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 46% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Shanghai Rendu Biotechnology and understanding these should be part of your investment process.

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.