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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Shanghai Baosight SoftwareLtd (SHSE:600845) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shanghai Baosight SoftwareLtd:

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).

Therefore, Shanghai Baosight SoftwareLtd has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 3.0% generated by the Software industry.

View our latest analysis for Shanghai Baosight SoftwareLtd

Above you can see how the current ROCE for Shanghai Baosight SoftwareLtd 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 Baosight SoftwareLtd .

The Trend Of ROCE

The trends we've noticed at Shanghai Baosight SoftwareLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 100% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. 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 152% 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.

If you want to continue researching Shanghai Baosight SoftwareLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.