The Return Trends At Shanghai Film (SHSE:601595) Look Promising

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Speaking of which, we noticed some great changes in Shanghai Film's (SHSE:601595) returns on capital, so let's have a look.

What Is 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. The formula for this calculation on Shanghai Film is:

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

0.037 = CN¥83m ÷ (CN¥2.9b - CN¥654m) (Based on the trailing twelve months to March 2024).

So, Shanghai Film has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 5.2%.

Check out our latest analysis for Shanghai Film

Above you can see how the current ROCE for Shanghai Film compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Film .

What Can We Tell From Shanghai Film's ROCE Trend?

We're delighted to see that Shanghai Film is reaping rewards from its investments and has now broken into profitability. The company now earns 3.7% on its capital, because five years ago it was incurring losses. 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Key Takeaway

To bring it all together, Shanghai Film has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 134% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Shanghai Film can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Shanghai Film, we've discovered 2 warning signs that you should be aware of.

While Shanghai Film isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.