Investors Will Want Shanghai Information2 Software's (SHSE:688435) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Shanghai Information2 Software (SHSE:688435) and its trend of ROCE, we really liked what we saw.

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 Information2 Software is:

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

0.011 = CN¥12m ÷ (CN¥1.2b - CN¥52m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Information2 Software has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Software industry average of 3.0%.

View our latest analysis for Shanghai Information2 Software

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Information2 Software's ROCE against it's prior returns. If you'd like to look at how Shanghai Information2 Software has performed in the past in other metrics, you can view this free graph of Shanghai Information2 Software's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanghai Information2 Software Tell Us?

We're delighted to see that Shanghai Information2 Software is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.1% on its capital. And unsurprisingly, like most companies trying to break into the black, Shanghai Information2 Software is utilizing 945% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.3%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Shanghai Information2 Software has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Shanghai Information2 Software has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 75% over the last year, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing to note, we've identified 1 warning sign with Shanghai Information2 Software and understanding it should be part of your investment process.

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.