Shandong Hiking InternationalLtd (SHSE:600735) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at Shandong Hiking InternationalLtd (SHSE:600735), it didn't seem to tick all of these boxes.

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

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. The formula for this calculation on Shandong Hiking InternationalLtd is:

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

0.10 = CN¥164m ÷ (CN¥2.2b - CN¥628m) (Based on the trailing twelve months to September 2024).

So, Shandong Hiking InternationalLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Personal Products industry.

View our latest analysis for Shandong Hiking InternationalLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Hiking InternationalLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shandong Hiking InternationalLtd.

The Trend Of ROCE

On the surface, the trend of ROCE at Shandong Hiking InternationalLtd doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 10%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line

In summary, we're somewhat concerned by Shandong Hiking InternationalLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 8.2% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Shandong Hiking InternationalLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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.