Stock Analysis

Investors Will Want Shanghai Pret Composites' (SZSE:002324) Growth In ROCE To Persist

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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Shanghai Pret Composites (SZSE:002324) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Pret Composites, this is the formula:

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

0.09 = CN¥545m ÷ (CN¥12b - CN¥6.0b) (Based on the trailing twelve months to March 2024).

So, Shanghai Pret Composites has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

Check out our latest analysis for Shanghai Pret Composites

SZSE:002324 Return on Capital Employed May 22nd 2024

In the above chart we have measured Shanghai Pret Composites' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Pret Composites .

What Does the ROCE Trend For Shanghai Pret Composites Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 9.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 153% more capital is being employed now too. So we're very much inspired by what we're seeing at Shanghai Pret Composites thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Shanghai Pret Composites' ROCE

All in all, it's terrific to see that Shanghai Pret Composites is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 90% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Shanghai Pret Composites can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Shanghai Pret Composites that we think you should be aware of.

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.