Shanghai Zijiang Enterprise Group's (SHSE:600210) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So, when we ran our eye over Shanghai Zijiang Enterprise Group's (SHSE:600210) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Zijiang Enterprise Group:

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

0.11 = CN¥809m ÷ (CN¥14b - CN¥6.6b) (Based on the trailing twelve months to March 2024).

So, Shanghai Zijiang Enterprise Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 4.7% it's much better.

Check out our latest analysis for Shanghai Zijiang Enterprise Group

In the above chart we have measured Shanghai Zijiang Enterprise Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Zijiang Enterprise Group .

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 44% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Shanghai Zijiang Enterprise Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that Shanghai Zijiang Enterprise Group has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shanghai Zijiang Enterprise Group's ROCE

In the end, Shanghai Zijiang Enterprise Group has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 55% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Shanghai Zijiang Enterprise Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shanghai Zijiang Enterprise Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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