There Are Reasons To Feel Uneasy About Shandong Hiking InternationalLtd's (SHSE:600735) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Shandong Hiking InternationalLtd (SHSE:600735), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Shandong Hiking InternationalLtd:

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

0.11 = CN¥172m ÷ (CN¥2.3b - CN¥730m) (Based on the trailing twelve months to September 2023).

Thus, Shandong Hiking InternationalLtd has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Personal Products industry average of 9.3%.

See our latest analysis for Shandong Hiking InternationalLtd

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'd like to look at how Shandong Hiking InternationalLtd has performed in the past in other metrics, you can view this free graph of Shandong Hiking InternationalLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shandong Hiking InternationalLtd Tell Us?

In terms of Shandong Hiking InternationalLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 18% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shandong Hiking InternationalLtd's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Shandong Hiking InternationalLtd's ROCE

While returns have fallen for Shandong Hiking InternationalLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Shandong Hiking InternationalLtd, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.