Be Wary Of Shanghai Putailai New Energy TechnologyLtd (SHSE:603659) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Shanghai Putailai New Energy TechnologyLtd (SHSE:603659) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shanghai Putailai New Energy TechnologyLtd, this is the formula:

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

0.058 = CN¥1.5b ÷ (CN¥43b - CN¥17b) (Based on the trailing twelve months to September 2024).

Therefore, Shanghai Putailai New Energy TechnologyLtd has an ROCE of 5.8%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See our latest analysis for Shanghai Putailai New Energy TechnologyLtd

Above you can see how the current ROCE for Shanghai Putailai New Energy TechnologyLtd 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 Putailai New Energy TechnologyLtd .

What Does the ROCE Trend For Shanghai Putailai New Energy TechnologyLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 21% five years ago, while capital employed has grown 592%. That being said, Shanghai Putailai New Energy TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shanghai Putailai New Energy TechnologyLtd might not have received a full period of earnings contribution from it.

On a related note, Shanghai Putailai New Energy TechnologyLtd has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Shanghai Putailai New Energy TechnologyLtd's ROCE

We're a bit apprehensive about Shanghai Putailai New Energy TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 29% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing Shanghai Putailai New Energy TechnologyLtd that you might find interesting.

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.