Shanghai AiyingshiLtd (SHSE:603214) Will Be Hoping To Turn Its Returns On Capital Around

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shanghai AiyingshiLtd (SHSE:603214) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Shanghai AiyingshiLtd:

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

0.088 = CN¥119m ÷ (CN¥2.6b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

So, Shanghai AiyingshiLtd has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Specialty Retail industry average of 4.4%.

View our latest analysis for Shanghai AiyingshiLtd

In the above chart we have measured Shanghai AiyingshiLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai AiyingshiLtd .

What Does the ROCE Trend For Shanghai AiyingshiLtd Tell Us?

In terms of Shanghai AiyingshiLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.8% from 17% five years ago. However it looks like Shanghai AiyingshiLtd 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.

On a side note, Shanghai AiyingshiLtd's current liabilities have increased over the last five years to 47% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Shanghai AiyingshiLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai AiyingshiLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 52% in the last five years. Therefore based on the analysis done in this article, we don't think Shanghai AiyingshiLtd has the makings of a multi-bagger.

Shanghai AiyingshiLtd does have some risks though, and we've spotted 2 warning signs for Shanghai AiyingshiLtd that you might be interested in.

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.