Be Wary Of Shanghai Huayi Group (SHSE:600623) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Shanghai Huayi Group (SHSE:600623), 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 Shanghai Huayi Group:

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

0.018 = CN¥667m ÷ (CN¥62b - CN¥26b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Huayi Group has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

See our latest analysis for Shanghai Huayi Group

Above you can see how the current ROCE for Shanghai Huayi Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Huayi Group .

The Trend Of ROCE

When we looked at the ROCE trend at Shanghai Huayi Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 2.3% five years ago. However it looks like Shanghai Huayi Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Shanghai Huayi Group has a high ratio of current liabilities to total assets of 42%. 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.

What We Can Learn From Shanghai Huayi Group's ROCE

To conclude, we've found that Shanghai Huayi Group is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 11% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Shanghai Huayi Group does have some risks though, and we've spotted 2 warning signs for Shanghai Huayi Group that you might be interested in.

While Shanghai Huayi 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.