Capital Allocation Trends At Shanghai Golden Bridge InfoTechLtd (SHSE:603918) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Shanghai Golden Bridge InfoTechLtd (SHSE:603918) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shanghai Golden Bridge InfoTechLtd:

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

0.01 = CN¥12m ÷ (CN¥1.6b - CN¥515m) (Based on the trailing twelve months to September 2023).

Thus, Shanghai Golden Bridge InfoTechLtd has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.7%.

Check out our latest analysis for Shanghai Golden Bridge InfoTechLtd

Above you can see how the current ROCE for Shanghai Golden Bridge InfoTechLtd 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 Golden Bridge InfoTechLtd .

What Can We Tell From Shanghai Golden Bridge InfoTechLtd's ROCE Trend?

When we looked at the ROCE trend at Shanghai Golden Bridge InfoTechLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.0% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shanghai Golden Bridge InfoTechLtd has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Shanghai Golden Bridge InfoTechLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai Golden Bridge InfoTechLtd's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 131% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Shanghai Golden Bridge InfoTechLtd does have some risks though, and we've spotted 3 warning signs for Shanghai Golden Bridge InfoTechLtd that you might be interested in.

While Shanghai Golden Bridge InfoTechLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.