Shanghai Shunho New Materials TechnologyLtd's (SZSE:002565) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Shanghai Shunho New Materials TechnologyLtd (SZSE:002565) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shanghai Shunho New Materials TechnologyLtd:

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

0.031 = CN¥69m ÷ (CN¥2.8b - CN¥594m) (Based on the trailing twelve months to March 2024).

Therefore, Shanghai Shunho New Materials TechnologyLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 4.7%.

View our latest analysis for Shanghai Shunho New Materials TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Shunho New Materials TechnologyLtd.

What Does the ROCE Trend For Shanghai Shunho New Materials TechnologyLtd Tell Us?

There hasn't been much to report for Shanghai Shunho New Materials TechnologyLtd's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Shanghai Shunho New Materials TechnologyLtd doesn't end up being a multi-bagger in a few years time.

Our Take On Shanghai Shunho New Materials TechnologyLtd's ROCE

In a nutshell, Shanghai Shunho New Materials TechnologyLtd has been trudging along with the same returns from the same amount of capital over the last five years. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 73% in the last five 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 more thing to note, we've identified 1 warning sign with Shanghai Shunho New Materials TechnologyLtd and understanding this should be part of your investment process.

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.