Capital Allocation Trends At Shanghai New Centurion Network Information Technology (SHSE:605398) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shanghai New Centurion Network Information Technology (SHSE:605398), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shanghai New Centurion Network Information Technology is:

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

0.037 = CN¥38m ÷ (CN¥1.2b - CN¥172m) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai New Centurion Network Information Technology has an ROCE of 3.7%. Even though it's in line with the industry average of 4.4%, it's still a low return by itself.

View our latest analysis for Shanghai New Centurion Network Information Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai New Centurion Network Information Technology.

The Trend Of ROCE

On the surface, the trend of ROCE at Shanghai New Centurion Network Information Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.7% from 35% five years ago. However it looks like Shanghai New Centurion Network Information Technology 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 related note, Shanghai New Centurion Network Information Technology has decreased its current liabilities to 14% 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.

The Bottom Line On Shanghai New Centurion Network Information Technology's ROCE

To conclude, we've found that Shanghai New Centurion Network Information Technology is reinvesting in the business, but returns have been falling. Since the stock has declined 11% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Shanghai New Centurion Network Information Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Shanghai New Centurion Network Information Technology 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.