Returns On Capital Signal Tricky Times Ahead For Shanghai Titan Scientific (SHSE:688133)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Shanghai Titan Scientific (SHSE:688133) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Shanghai Titan Scientific, this is the formula:

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

0.018 = CN¥60m ÷ (CN¥4.6b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Titan Scientific has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

See our latest analysis for Shanghai Titan Scientific

In the above chart we have measured Shanghai Titan Scientific'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 Titan Scientific .

What The Trend Of ROCE Can Tell Us

In terms of Shanghai Titan Scientific's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like Shanghai Titan Scientific 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.

What We Can Learn From Shanghai Titan Scientific's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Titan Scientific's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 87% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Shanghai Titan Scientific (including 1 which makes us a bit uncomfortable) .

While Shanghai Titan Scientific 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.