Shanghai Ailu Package (SZSE:301062) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shanghai Ailu Package (SZSE:301062), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shanghai Ailu Package is:

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

0.053 = CN¥116m ÷ (CN¥2.7b - CN¥528m) (Based on the trailing twelve months to March 2024).

So, Shanghai Ailu Package has an ROCE of 5.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.

Check out our latest analysis for Shanghai Ailu Package

In the above chart we have measured Shanghai Ailu Package's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Ailu Package for free.

The Trend Of ROCE

When we looked at the ROCE trend at Shanghai Ailu Package, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.0% over the last five years. However it looks like Shanghai Ailu Package 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Shanghai Ailu Package's ROCE

To conclude, we've found that Shanghai Ailu Package is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 11% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 2 warning signs with Shanghai Ailu Package and understanding them should be part of your investment process.

While Shanghai Ailu Package may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com