Returns On Capital At Shandong Liancheng Precision Manufacturing (SZSE:002921) Paint A Concerning Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shandong Liancheng Precision Manufacturing (SZSE:002921), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Shandong Liancheng Precision Manufacturing:

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

0.0093 = CN¥14m ÷ (CN¥2.5b - CN¥900m) (Based on the trailing twelve months to September 2024).

Thus, Shandong Liancheng Precision Manufacturing has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.8%.

See our latest analysis for Shandong Liancheng Precision Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Liancheng Precision Manufacturing's ROCE against it's prior returns. If you're interested in investigating Shandong Liancheng Precision Manufacturing's past further, check out this free graph covering Shandong Liancheng Precision Manufacturing's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shandong Liancheng Precision Manufacturing Tell Us?

In terms of Shandong Liancheng Precision Manufacturing's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.9% from 5.7% five years ago. However it looks like Shandong Liancheng Precision Manufacturing 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Shandong Liancheng Precision Manufacturing is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 5.4% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shandong Liancheng Precision Manufacturing (of which 2 can't be ignored!) that you should know about.

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.