Shandong Head GroupLtd (SZSE:002810) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Shandong Head GroupLtd (SZSE:002810) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Shandong Head GroupLtd is:

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

0.099 = CN¥292m ÷ (CN¥3.7b - CN¥799m) (Based on the trailing twelve months to September 2023).

Therefore, Shandong Head GroupLtd has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.8%.

Check out our latest analysis for Shandong Head GroupLtd

In the above chart we have measured Shandong Head GroupLtd'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 Shandong Head GroupLtd .

What Does the ROCE Trend For Shandong Head GroupLtd Tell Us?

There are better returns on capital out there than what we're seeing at Shandong Head GroupLtd. The company has employed 211% more capital in the last five years, and the returns on that capital have remained stable at 9.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Shandong Head GroupLtd's ROCE

In summary, Shandong Head GroupLtd has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 73% 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.

Like most companies, Shandong Head GroupLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.