Shanghai Pret Composites (SZSE:002324) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 when we looked at Shanghai Pret Composites (SZSE:002324) and its trend of ROCE, we really liked what we saw.

What Is 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 Pret Composites, this is the formula:

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

0.07 = CN¥417m ÷ (CN¥11b - CN¥5.4b) (Based on the trailing twelve months to June 2024).

Thus, Shanghai Pret Composites has an ROCE of 7.0%. 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.

View our latest analysis for Shanghai Pret Composites

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 .

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 7.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 153% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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 48% 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

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shanghai Pret Composites has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 21% to shareholders. So with that in mind, we think the stock deserves further research.

Shanghai Pret Composites does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Shanghai Pret Composites 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.