Investors Will Want Shanghai Baosight SoftwareLtd's (SHSE:600845) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Shanghai Baosight SoftwareLtd (SHSE:600845) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Shanghai Baosight SoftwareLtd, this is the formula:

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

0.19 = CN¥2.7b ÷ (CN¥23b - CN¥8.7b) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Baosight SoftwareLtd has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 3.3% generated by the Software industry.

See our latest analysis for Shanghai Baosight SoftwareLtd

In the above chart we have measured Shanghai Baosight SoftwareLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Baosight SoftwareLtd .

So How Is Shanghai Baosight SoftwareLtd's ROCE Trending?

Investors would be pleased with what's happening at Shanghai Baosight SoftwareLtd. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 100%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Shanghai Baosight SoftwareLtd's ROCE

All in all, it's terrific to see that Shanghai Baosight SoftwareLtd is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 255% 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 Baosight SoftwareLtd can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Shanghai Baosight SoftwareLtd that you might find interesting.

While Shanghai Baosight SoftwareLtd 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.