There Are Reasons To Feel Uneasy About Shanghai AiyingshiLtd's (SHSE:603214) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. In light of that, when we looked at Shanghai AiyingshiLtd (SHSE:603214) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Shanghai AiyingshiLtd, this is the formula:

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

0.071 = CN¥97m ÷ (CN¥2.5b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai AiyingshiLtd has an ROCE of 7.1%. In absolute terms, that's a low return, but it's much better than the Specialty Retail industry average of 4.9%.

See our latest analysis for Shanghai AiyingshiLtd

Above you can see how the current ROCE for Shanghai AiyingshiLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai AiyingshiLtd .

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

On the surface, the trend of ROCE at Shanghai AiyingshiLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shanghai AiyingshiLtd's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shanghai AiyingshiLtd's ROCE

To conclude, we've found that Shanghai AiyingshiLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 56% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Shanghai AiyingshiLtd you'll probably want to 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.