Shanghai New Centurion Network Information Technology (SHSE:605398) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanghai New Centurion Network Information Technology (SHSE:605398), it didn't seem to tick all of these boxes.

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 New Centurion Network Information Technology:

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

0.039 = CN¥42m ÷ (CN¥1.2b - CN¥139m) (Based on the trailing twelve months to March 2024).

Therefore, Shanghai New Centurion Network Information Technology has an ROCE of 3.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.9%.

Check out our latest analysis for Shanghai New Centurion Network Information Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai New Centurion Network Information Technology's ROCE against it's prior returns. If you're interested in investigating Shanghai New Centurion Network Information Technology's past further, check out this free graph covering Shanghai New Centurion Network Information Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai New Centurion Network Information Technology Tell Us?

In terms of Shanghai New Centurion Network Information Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 37%, but since then they've fallen to 3.9%. 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'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 side note, Shanghai New Centurion Network Information Technology has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Shanghai New Centurion Network Information Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Shanghai New Centurion Network Information Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 6.6% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Shanghai New Centurion Network Information Technology, 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.