Returns At Shanghai Xinhua Media (SHSE:600825) Are On The Way Up

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Shanghai Xinhua Media (SHSE:600825) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai Xinhua Media, this is the formula:

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

0.0022 = CN¥5.9m ÷ (CN¥4.3b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai Xinhua Media has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Media industry average of 4.9%.

See our latest analysis for Shanghai Xinhua Media

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'd like to look at how Shanghai Xinhua Media has performed in the past in other metrics, you can view this free graph of Shanghai Xinhua Media's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Xinhua Media Tell Us?

Shareholders will be relieved that Shanghai Xinhua Media has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.2% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

Our Take On Shanghai Xinhua Media's ROCE

In summary, we're delighted to see that Shanghai Xinhua Media has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 20% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Shanghai Xinhua Media does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Shanghai Xinhua Media 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.