Returns On Capital Signal Tricky Times Ahead For Shanghai Putailai New Energy TechnologyLtd (SHSE:603659)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Shanghai Putailai New Energy TechnologyLtd (SHSE:603659) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai Putailai New Energy TechnologyLtd is:

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

0.078 = CN¥1.9b ÷ (CN¥42b - CN¥17b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Putailai New Energy TechnologyLtd has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

See our latest analysis for Shanghai Putailai New Energy TechnologyLtd

In the above chart we have measured Shanghai Putailai New Energy TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Putailai New Energy TechnologyLtd .

So How Is Shanghai Putailai New Energy TechnologyLtd's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 18% five years ago, while the business's capital employed increased by 541%. Usually this isn't ideal, but given Shanghai Putailai New Energy TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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 separate but related note, it's important to know that Shanghai Putailai New Energy TechnologyLtd has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Shanghai Putailai New Energy TechnologyLtd's ROCE

To conclude, we've found that Shanghai Putailai New Energy TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 47% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Shanghai Putailai New Energy TechnologyLtd we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Shanghai Putailai New Energy TechnologyLtd 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.