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

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Shanghai Zijiang Enterprise Group (SHSE:600210) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. The formula for this calculation on Shanghai Zijiang Enterprise Group is:

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

0.10 = CN¥815m ÷ (CN¥15b - CN¥7.0b) (Based on the trailing twelve months to June 2024).

So, Shanghai Zijiang Enterprise Group has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Packaging industry.

See our latest analysis for Shanghai Zijiang Enterprise Group

Above you can see how the current ROCE for Shanghai Zijiang Enterprise Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shanghai Zijiang Enterprise Group for free.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

Another thing to note, Shanghai Zijiang Enterprise Group has a high ratio of current liabilities to total assets of 47%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To sum it up, Shanghai Zijiang Enterprise Group has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Shanghai Zijiang Enterprise Group does have some risks though, and we've spotted 1 warning sign for Shanghai Zijiang Enterprise Group that you might be interested in.

While Shanghai Zijiang Enterprise Group 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.